fair value hedge accounting for a portfolio hedge of interest rate risk

EXPOSURE DRAFT OF PROPOSED AMENDMENTS TO [DRAFT] IAS 39 AUGUST 2003
(c)
need to be changed each period. This requires de- and
re-designation of the individual items that constitute the hedged
item, which gives rise to significant systems needs.
Fair value hedge accounting requires the carrying amount of the
hedged item to be adjusted for the effect of changes in the
hedged risk. * Applied to a portfolio hedge, this could involve
changing the carrying amounts of many thousands of individual
items. Also, for any items subsequently de-designated from
being hedged, the revised carrying amount must be amortised
over the item’s remaining life. † This, too, gives rise to
significant systems needs.
BC6. The Board agreed to explore ways to deal with each of these issues. The
Board also agreed that it would propose a change to IAS 39 only if the
change was consistent with the principles that underlie IAS 39’s
requirements on derivatives and hedge accounting. The three principles
that are most relevant to a portfolio hedge of interest rate risk are:
(a) derivatives should be measured at fair value;
(b)
(c)
Prepayment risk
all material hedge ineffectiveness should be identified and
recognised in profit or loss; and
only items that are assets and liabilities should be reported 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.
BC7. In considering the issue described in paragraph BC5(a), the Board noted
that a prepayable item can be viewed as a combination of a
non-prepayable item and a prepayment option. It follows that the fair
value of a fixed rate prepayable item changes for two reasons when
interest rates move:
* IAS 39, paragraph 153
† IAS 39, paragraph 157
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