Financial Reporting Committee Robert Garnett Esq Chairman ...

Robert Garnett Esq
Chairman
International Financial Reporting Interpretations Committee
30 Cannon Street
London
EC4M 6XH
Dear Bob
IFRIC D22 – Hedges of a Net Investment in a Foreign Operation
We are pleased to submit our comments on the above proposals.
Who we are
Financial Reporting Committee
19 October 2007
The Hundred Group represents the views of the finance directors of the UK’s largest
companies drawn largely, but not entirely, from the constituents of the FTSE100 Index. Our
members are the finance directors of companies whose market capitalisation collectively
represents over 80% of that of companies listed on the London Stock Exchange. While this
letter expresses the views of The Hundred Group of Finance Directors as a whole, they are
not necessarily those of our individual members or their respective employers.
Welcome in principle
We welcome the proposals in principle as they address the practical difficulties that are
sometimes encountered by multi-national companies in applying the net investment hedge
accounting rules prescribed by IAS39 “Financial Instruments: Recognition and
Measurement”.
Hedged risk
We agree that net investment hedge accounting should be permitted where there is a hedge
of the foreign currency exposure arising between the functional currency of a foreign
operation and the functional currency of any parent entity as we believe that this recognises
the reality of life in many multi-national groups in which foreign currency translation
exposures arise at the level of intermediate parent entities.
We also agree that net investment hedge accounting should not be permitted when
translating the parent’s functional currency into a different currency because the selection of
a presentation currency has no economic impact on the financial statements of the parent
entity.
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Location of the hedging instrument
We welcome the proposal that the hedging instrument in a hedging relationship designated
as a net investment hedge may be held by any entity within the group (except the foreign
operation that itself is being hedged) as we believe that this recognises the way in which
many multi-national groups manage their foreign currency translation exposures.
We agree that an exposure to foreign currency risk arising from a net investment in a foreign
operation should qualify for hedge accounting only once. However, we believe that the
practical implications of this principle should be explained more clearly either in the body of
the interpretation or by way of the illustrative examples.
Effectiveness testing
We agree that in assessing the effectiveness of a net investment hedge the change in value
of the hedging instrument should be computed by reference to the functional currency of the
parent entity against whose functional currency the hedged risk is measured but we believe
that it would be helpful if effectiveness testing in this context could be demonstrated in the
illustrative examples.
Transitional arrangements
We believe that the transitional arrangements are rather convoluted. We would recommend a
simple statement to the effect that the interpretation should be applied prospectively from the
date of initial application. Otherwise, there is a risk that the interpretation may be viewed as
encouraging preparers to backdate the designation and documentation of hedging
relationships.
Differences between IFRS and US GAAP
We understand that US GAAP is more restrictive than IFRS with regard to net investment
hedge accounting. While we would not recommend convergence with US GAAP in this
respect, we suggest that the relevant differences between IFRS and US GAAP are
considered in the “Basis for Conclusions”.
Please feel free to contact me if you wish to discuss our comments on the proposals.
Yours sincerely
Ken Lever
Chairman
The Hundred Group - Financial Reporting Committee
T: +44 (0) 20 8877 5140
F: +44 (0) 20 8874 3882
E: klever@tomkins.co.uk
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