The IASB held their last meeting of the hedge accounting project on October 27, 2010 and have instructed their staff to prepare an exposure draft, with its issuance to be followed by a 90 day comment period. Updated guidance is scheduled for issuance by June 2011
During this last meeting the IASB seemed to make a substantial change to their historic position of excluding time value on options from the hedged item. They chose to consider the time value on the option as a premium, similar to an insurance premium. As a result of this change in perspective, they propose that this premium be looked at in 2 ways, dependent on the hedged item. If the hedged item transaction is defined as being associated with an anticipated transaction, the time value changes would accumulate in OCI and be “recycled” to earnings, apparently together with the hedged item. This would be similar to current G20 treatment under US GAAP.
For hedged items that are already recognized transactions (inventory, debt, etc.) the change in value would accumulate in OCI, with the portion related to the current period being transferred to earnings. This seems to approach the FASB proposal in the ASC Update where the premium is amortized to income in a rational manner.
There is an additional twist to the IASB proposal. In each period the cumulative amount reclassified to income would represent either the cumulative change in time value (market value) or the cumulative change per the amortization schedule. In the notes published it suggested the change to income would be the lesser of the two but this should be checked carefully as it seems too good to be true.
The meeting notes do not address if excluding time value would continue to be an election. We look forward to the issuance of the new draft and the opportunity to wade through this together in the future.
- IASB (www.iasb.org)
- AICPA IFRS resources site (www.ifrs.com)
- SEC Roadmap to IFRS (www.sec.gov/spotlight/ifrsroadmap.htm)
- Deloitte (www.iasplus.com)
- PricewaterhouseCoopers (www.pwc.com/gx/en/ifrs-reporting/index.jhtml)
- EY (www.ey.com/GL/en/Issues/IFRS)
- KPMG (www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/IFRS-briefing-sheets/Pages/default.aspx)