Derivative Accounting Convergence: The path from Where We Are (US GAAP) to Where We Are Headed (IFRS)

Derivative Accounting Convergence: The path from Where We Are to Where We Are Headed Presented by: Helen Kane, President www.hedgetrackers.com February 17, 2011

International Financial Reporting Standard ,[object Object],[object Object],[object Object],[object Object]

Background ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Current Events ,[object Object],[object Object],[object Object],[object Object],[object Object]

Exposure Draft Objectives ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

IAS 39 Background ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Comparison Flow ,[object Object],[object Object],[object Object],ASC- ED ASC-Proposed Update Exposure Draft May 26, 2010 IAS 39 IAS 39 Current Guidance IASB-ED IASB Exposure Draft Exposure Draft December 9, 2010

Derivative Defined ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],ASC- ED No significant change ,[object Object],[object Object],[object Object],[object Object],IASB-ED No significant change

Virtual Derivatives ,[object Object],[object Object],[object Object],ASC- ED No significant change IAS 39 No documentation requirements surrounding “Own Use” contracts (assumption of normal purchase/normal sale) Election of either insurance or derivative accounting required IASB-ED “ Own Use” contracts may elect treatment as derivatives

Embedded FX Derivatives ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],IASB-ED No significant change

Hedging AFS Securities ,[object Object],[object Object],ASC- ED No significant change IAS 39 Currency gain or loss on AFS Security recorded in P&L, therefore special hedge accounting not required to align currency earnings effect of hedge with security IASB-ED No significant change

Fair Value ,[object Object],[object Object],[object Object],ASC- ED No significant change IAS 39 Amount an asset could be exchanged or a liability settled between knowledgeable willing parties No “own credit” effect Bid/Ask pricing unless offsetting Elect and disclose use of trade-date or settlement-date accounting IASB-ED Own credit effects recorded in OCI

Qualifying Hedging Instrument ,[object Object],[object Object],ASC- ED No significant change ,[object Object],[object Object],[object Object],[object Object],[object Object],IASB-ED Nonderivative financial assets and liabilities measured at fair value in P&L eligible as hedging instrument (not net written options) Interco balances can only be designated for FX risk May designate layers

Qualifying Hedged Risks ,[object Object],[object Object],[object Object],[object Object],[object Object],ASC- ED IAS 39 Separately identifiable and reliably measured financial risk Foreign Exchange Credit Overall ,[object Object],[object Object],[object Object]

Qualifying Hedged Items ,[object Object],[object Object],ASC- ED No significant change ,[object Object],[object Object],[object Object],IASB-ED No significant change

Qualifying Interco Hedged Items ,[object Object],[object Object],ASC- ED Royalty payments , interest payments or management charges between members of the same group cannot qualify as hedged item IAS 39 Intragroup transaction may qualify in a cash flow hedge provided currency risk will affect consolidate profit or loss Usually royalty payments, interest payments or management charges cannot qualify IASB-ED No significant change

Qualifying Hedged Items ,[object Object],[object Object],[object Object],[object Object],ASC- ED No significant change IAS 39 Portfolio of interest rate items permitted. All other groups must be similar No centralized netting permitted IASB-ED Items in group must individually qualify for hedge accounting treatment May represent offsetting positions , can net to zero Offsetting positions are grossed up , gain/loss apportioned to P&L

Hedge Effectiveness Testing ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],IASB-ED No significant change

Hedge Effectiveness Testing ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],IASB-ED No more retrospective testing Expectation of other than accidental offset and meets “objective” of strategy No “bright lines”

Credit in Hedge Effectiveness Testing ,[object Object],[object Object],[object Object],[object Object],IAS 39 Derivative credit adjusted for counterparty, underlying not IASB-ED No significant changes

Hedge Effectiveness Testing ,[object Object],[object Object],[object Object],[object Object],IAS 39 No prohibition against deliberate mismatch of hedge item and derivative to create over or under hedging IASB-ED Ensure that hedge relationship does not produce and unbiased result: reduce ineffectiveness

Hedge Effectiveness Measurement ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],IAS 39 Present value guiding concept Hypothetical derivative Change in fair value method IASB-ED No significant change

Hedge Accounting ,[object Object],[object Object],[object Object],[object Object],[object Object],ASC- ED No significant change ,[object Object],[object Object],[object Object],[object Object],[object Object],IASB-ED No significant change

Hedge Accounting for Options ,[object Object],[object Object],[object Object],ASC- ED Option premium expense to be amortized to income in “rational way ” IAS 39 Special Hedge Accounting for Intrinsic Value of Options only: time value changes recorded in P&L as they occur ,[object Object],[object Object],[object Object],[object Object]

Hedge Accounting ,[object Object],[object Object],[object Object],ASC- ED Both over and under- performance of cash flow hedges in income IAS 39 Cash Flow ineffectiveness limited to over performance of derivatives Changes in Fair Value item recognized in underlying asset/liability in BS and P&L IASB-ED No change to cash flow ineffectiveness calculation: addressed by no bias requirement Changes in Fair Value item in BS (separate) and OCI, not P&L

Hedge Accounting for Cash Flow Exposures ,[object Object],[object Object],ASC- ED No significant change IAS 39 Effective gains/losses may remain in OCI until hedged item recognized in income or may adjust the basis of hedged items recorded in balance sheet IASB-ED Must adjust the basis of hedged items recorded in balance sheet

Hedge Accounting for Cash Flow Exposures ,[object Object],[object Object],[object Object],ASC- ED No significant change IAS 39 Gains/losses on anticipated transactions stay in OCI until no longer expected to occur No specified 2-month extension of hedge period IASB-ED No significant change

Hedge Accounting for Net Investment ,[object Object],[object Object],ASC- ED No significant change IAS 39 Gains/losses on Net Investments in OCI/CTA reclassified upon disposal or partial disposal of foreign operation IASB-ED No significant change

Termination of Hedge Relationship ,[object Object],[object Object],[object Object],[object Object],ASC- ED No voluntary dedesignation Compensating contract relationship must be documented ,[object Object],[object Object],[object Object],[object Object],IASB-ED No voluntary dedesignation Change in hedge objective can terminate relationship

Dedesignation/Redesignation Events ,[object Object],[object Object],ASC- ED Adjustments to derivative notional only requires amendment of inception documentation, not dedesignation ,[object Object],[object Object],IASB-ED Proactive “rebalancing of hedge relationship” requires update to documentation The replacement or rollover of a hedge instrument is not an expiration (dedesignation) if contemplated in documentation

Status on adoption for US companies Source: PricewaterhouseCoopers

ASC Update Reference Paragraphs ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

IASB Exposure Draft ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Additional resources ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Derivative Accounting Convergence: The path from Where We Are (US GAAP) to Where We Are Headed (IFRS)

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Derivative Accounting Convergence: The path from Where We Are (US GAAP) to Where We Are Headed (IFRS)

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