A New Regime for Derivatives Accounting - PowerPoint PPT Presentation

Board of Trustees

Appoints IASB, IFRIC, SAC

Oversees effectiveness and funding

StandardsAdvisory

Council

International Accounting

Standards Board (IASB)

Develops IFRSs

International Financial Reporting

InterpretationsCommittee (IFRIC)

Develops Authoritative Interpretations of IFRS

EFRAG

SupervisoryBoard

EFRAG

Technical Expert

Group

Insurancesub-committee

Political level

Technical level

AccountingRegulatory

Committee (ARC)

European

Commission

Advises

Brings Recommendations to

• Existing standards on Financial Instruments - IAS 32 and IAS 39
• June 2002 - Proposed Amendments
• November 2002 – over 160 comment letters received
• March 2003 – “public roundtables” held
• August 2003 - Proposed Amendments: Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk

• Over 7,000 European firms affected from 2005.
• Each country can expand scope of EU regulation.
• Companies not under the EU Regulation will continue to be subject to Accounting Directives and local accounting standards
• Even where convergence is an objective, there are still likely to be differences for a while
• These differences, together with the related impacts on tax and regulatory reporting, could have a significant influence on those many companies that have a choice to make

• any financial instrument can be measured at fair value
• ‘what is fair value?’
• The Exposure Draft presented a number of potential issues
• From our work with the IASB, we are hopeful that many of these issues have been resolved
• Final wording?

• All derivatives on balance sheet at fair value.
• Doing nothing will create significant earnings volatility.
• Achieving hedge accounting is a challenge:
• Strict requirements for hedge designation.
• Process issues are significant.
• Resource requirements are large.
• Ability to achieve portfolio hedge accounting is limited, and still moving.
• Expect some earnings volatility even so.
• Economic hedges and hedge accounting are likely to differ.

• Split accounting for compound instruments
• Liability component is initially measured at fair value with any residual amount assigned to equity
• A derivative based on an entity’s own equity instruments, depending on its terms for settlement, may be accounted for as:
• a derivative asset/liability (net amount)
• a liability for the gross redemption amount
• equity

• The model is new and still moving.
• Still not sure what it means other than change.
• It will impact all securitisation transactions executed from 1 January 2004
• …but we won’t see the final model until the year end.

and Answers?