Institute of Chartered Accountants of New Zealand
Request for Comment on
Exposure Draft of Proposed
Amendments to IAS 39 Financial
Instruments: Recognition and
FAIR VALUE HEDGE
ACCOUNTING FOR A PORTFOLIO
HEDGE OF INTEREST RATE RISK
Issued by the Financial Reporting Standards Board
Institute of Chartered Accountants of New Zealand
REQUEST FOR COMMENT ON EXPOSURE DRAFT OF PROPOSED
AMENDMENTS TO IAS 39
FAIR VALUE HEDGE ACCOUNTING FOR A PORTFOLIO HEDGE OF
INTEREST RATE RISK
The International Accounting Standards Board (IASB) has issued Exposure Draft of
Proposed Amendments to IAS 39 Financial Instruments: Recognition and Measurement.
The title of the proposed amendment is Fair Value Hedge Accounting for a Portfolio
Hedge of Interest Rate Risk.
The exposure draft is accompanied by a basis of conclusion and illustrative examples and is
freely available from the IASB’s web site at www.iasb.org.uk. The Institute also provides
a link to the IASB web site from the Adoption of IFRS section of its own site at
The FRSB seeks the comments of constituents on the proposals set out in this Discussion
Paper. Comments should be addressed to:
The Director – Accounting & Professional Standards
Institute of Chartered Accountants
PO Box 11342, Wellington
The due date for comments to the FRSB is 31 October 2003. This exposure period is
shorter than normal because of the limited scope of the amendment and the intention of the
IASB to have the amendment in place as soon as practicable.
All comments received by the FRSB will be taken into account in the finalisation of its
response to the IASB. All individual submissions received will, unless otherwise requested,
also be forwarded to the IASB and made available to the public.
It would be appreciated if respondents could include a copy of the submission in electronic
form. This allows for more efficient collation and analysis of comments.
Constituents may also comment direct to the IASB. Constituents are requested to forward to
the FRSB a copy of any comments submitted to the IASB. Submissions sent direct to the
IASB may be sent by mail, fax or email to:
Senior Project Manager
International Accounting Standards Board,
30 Cannon Street, London EC4M 6XH, United Kingdom
Fax: +44 (0)20 7246 6411
The due date for comments to the IASB is 14 November 2003.
The Financial Reporting Standards Board (FRSB) is implementing the decision of the
Accounting Standards Review Board (ASRB) to adopt International Financial Reporting
Standards (IFRS)1 issued by the IASB. Application of the standards will be to reporting
periods beginning on or after 1 January 2007 (or, in the case of entities choosing to adopt
early reporting periods beginning on or after 1 January 2005).
The ASRB and the FRSB have agreed that New Zealand (NZ) standards should continue to
apply to both profit-oriented and public benefit entities. Standards issued by the IASB have
been developed for application to profit-oriented entities. As a consequence, the FRSB
intends, where necessary, to introduce additional material to the international standards to
ensure that they can be applied in the New Zealand environment by all reporting entities.
The resulting standards will be referred to as NZ IFRS or NZ IAS, as appropriate.
Constituents are directed to the FRSB’s document on the Process for Adoption of IFRSs at
www.icanz.co.nz for further information.
The objectives of the FRSB’s exposure of IFRS are:
§ to ensure reasonable steps are taken to obtain submissions from persons or
organisations or their representatives who will be affected by the adoption of the
standard and, in particular, by the proposed New Zealand specific changes to the
§ to identify issues in relation to the IFRS that the FRSB should raise with the IASB;
§ to alert constituents to changes in financial reporting as a result of adoption of an
The Exposure Drafts do not include differential reporting exemptions. The Ministry of
Economic Development (MED) is currently reviewing the financial reporting structure in
New Zealand. The outcome of the MED’s review will determine which types of entities are
required to apply NZ IFRS .
Background to Proposed Amendments to IAS 393
In June 2002, the IASB published an Exposure Draft of limited improvements to IAS 39
Financial Instruments: Recognition and Measurement. At that time the Board did not wish
to reconsider the fundamental approach to the accounting for financial instruments. The
Unless otherwise specified, IFRS refer to International Accounting Standards (IAS) (inherited by the
IASB from its predecessor body), IFRS, and the interpretations of both types of standards.
Refer to the article by Liz Hickey and Tony van Zijl “The proposed new financial reporting
structure”, Chartered Accountants Journal, May 2003, pp 54-55, for a discussion on the proposed
financial reporting structure.
The background information draws extensively on the Exposure Draft of Proposed Amendments to
IAS 39 Financial Instruments: Recognition and Measurement.
Exposure Draft proposed only limited changes to the requirements for hedge accounting,
either to achieve convergence with the equivalent US accounting standard or to incorporate
into IAS 39 guidance that had been issued by the Implementation Guidance Committee
appointed by the Board’s predecessor organisation, the International Accounting Standards
The IASB received over 170 comment letters on the Exposure Draft. In addition, in March
2003, it held a series of nine roundtable discussions, in which over a hundred organisations
and individuals took part. One of the areas of concern was hedge accounting for a portfolio
hedge of interest rate risk (sometimes referred to as ‘macro hedging’) and the treatment of
demand deposits (sometimes referred to as ‘core deposits’) in hedge accounting. Concern
was expressed that it is very difficult under IAS 39 to achieve fair value hedge accounting
for such a hedge.
The IASB agreed to examine whether and how IAS 39 might be amended to enable fair
value hedge accounting to be used more readily for a portfolio hedge of interest rate risk.
The IASB established that any solution would need to:
(a) meet the principles that underlie IAS 39’s requirements on derivatives and
hedge accounting, and
(b) be workable in practice for entities that manage interest rate risk on a portfolio
basis, allow data captured for risk management to be used in preparing financial
statements and not require entities to make major systems changes.
The three principles that are most relevant to fair value hedge accounting for a portfolio
hedge of interest rate risk are:
(i) derivatives should be measured at fair value;
(ii) all material hedge ineffectiveness should be identified and recognised in profit
or loss; and
(iii) only items that are assets and liabilities should be presented as such in the
balance sheet. Deferred losses are not assets and deferred gains are not
liabilities. However, if an asset or liability is hedged, any change in its fair value
that is attributable to the hedged risk should be presented in the balance sheet.
The IASB has concluded that the amendments to IAS 39 proposed in this Exposure Draft
meet these principles.
As a general principle IFRS 1 First Time Application of International Financial Reporting
Standards requires that IFRS in effect at the reporting date when IFRS are first applied be
retrospectively applied to the comparatives. One of the exceptions is IAS 39. Entities are
required to apply IAS 39 prospectively. One of the concerns expressed about IAS 39 was
what was perceived as an onerous requirement to document each individual hedge. The
proposed portfolio approach alleviates this burden, but only from the date the amendments
The proposed date of application of the amendments to IAS 39 is for periods beginning on or
after 1 January 2005. Earlier application is permitted, which will have the effect of allowing
macro hedging as soon as the proposals are formally approved and released.
Request from Comment by the IASB
The FRSB seeks comments on the proposed amendments to IAS 39 Financial Instruments:
Recognition and Measurement and would like respondents to express a clear overall opinion
on whether the proposed adoption, as a whole, is supported.
The FRSB would prefer that respondents supplement their opinions by detailed comments,
whether supportive or critical, on the major issues. The FRSB regards both critical and
supportive comments as essential to a balanced review and will consider all submissions,
whether they address all specific matters, additional issues or only one issue.
Matters raised by the IASB
The exposure draft contains two questions which the IASB has highlighted that it is seeking
1. Draft paragraph 128A proposes that in a fair value hedge of the interest rate risk
associated with a portion of a portfolio of financial assets (or financial liabilities), the
hedged item may be designated in terms of an amount of assets (or liabilities) in a
maturity time period, rather than as individual assets or liabilities or the overall net
position. It also proposes that the entity may hedge a portion of the interest rate risk
associated with this designated amount. For example, it may hedge the change in the
fair value of the designated amount attributable to changes in interest rates on the basis
of expected, rather than contractual, repricing dates. However, the IASB concluded that
ineffectiveness arises if these expected repricing dates are revised (eg in the light of
recent prepayment experience), or actual repricing dates differ from those expected.
Draft paragraph A36 describes how the amount of such ineffectiveness is calculated.
Paragraphs BC16-BC27 of the Basis for Conclusions set out alternative methods of
designation that the IASB considered, their effect on measuring ineffectiveness and the
basis for the IASB’s decisions including why it rejected these alternative methods. Do
you agree with the proposed designation and the resulting effect on measuring
ineffectiveness? If not, (a) in your view how should the hedged item be designated and
why? (b) would your approach meet the principle underlying IAS 39 that all material
ineffectiveness (arising from both over- and under-hedging) should be identified and
recognised in profit or loss? (c) under your approach, how and when would amounts
that are presented in the balance sheet line items referred to in paragraph 154 be
removed from the balance sheet?
2. Draft paragraph A30(b) proposes that all of the assets (or liabilities) from which the
hedged amount is drawn must be items that could have qualified for fair value hedge
accounting if they had been designated individually. It follows that a financial liability
that the counterparty can redeem on demand (ie demand deposits and some time
deposits) cannot qualify for fair value hedge accounting for any time period beyond the
shortest period in which the counterparty can demand payment. Paragraphs BC13-
BC15 of the Basis for Conclusions set out the reasons for this proposal. Do you agree
that a financial liability that the counterparty can redeem on demand cannot qualify for
fair value hedge accounting for any time period beyond the shortest period in which the
counterparty can demand payment? If not, (a) do you agree with the IASB’s decision
(which confirms an existing requirement in IAS 32) that the fair value of such a
financial liability is not less than the amount payable on demand? If not, why not? (b)
would your view result in such a liability being recognised initially at less than the
amount received from the depositor, thus potentially giving rise to a gain on initial
recognition? If not, why not? If you do not agree that the situation outlined in (b) is the
result, how would you characterise the change in value of the hedged item?
Matters raised by the FRSB
IAS 39 Financial Instruments: Recognition and Measurement has not yet been through the
New Zealand IFRS conversion process. If approved, the proposed amendment to this
standard will alter the text of IAS 39. The FRSB will consider any New Zealand
requirements when the amended IAS 39 is converted and exposed as ED NZ IAS 39. Under
the current timetable this will happen in the first quarter of 2004, corresponding with the
release of the improved IAS 39.
The FRSB also intends to issue the revised IAS 39 as a separate New Zealand FRS, with
application from periods beginning on or after 1 January 2005. This will fill a gap in
financial reporting requirements for financial instruments. Feedback on the current proposal
will provide valuable input into that process.
The FRSB would value comments on:
1. Whether the proposed approach will be effective for New Zealand entities that hedge
interest rate risk on a portfolio basis;
2. Whether the proposals in relation to demand deposits are appropriate and workable;
3. Whether the application dates, when read in conjunction with the transitional provisions
in IFRS 1, are appropriate;
4. Whether there are any regulatory issues or other issues arising in the New Zealand
environment that may affect the implementation of the proposals, particularly any
issues relating to:
public benefit entities;
public sector profit-oriented entities; and
the Privacy Act 1993;
5. Whether there are any other issues arising from the proposed amendments to IAS 39
Financial Instruments: Recognition and Measurement that you consider that the FRSB
should raise with the IASB; and
6. Whether adoption of the proposed amendments is in the best interests of users of
general purpose financial reports in New Zealand.