💼 Risk Management and Hedge Accounting
The Council members didn't hold back on their thoughts about hedge accounting. They shared their experiences and made suggestions on how to make hedge accounting guidance more user-friendly and representative of how companies manage their risks. The goal? To improve the decision usefulness of disclosures about risk management and hedging activities.
Current Application of Hedge Accounting to Economic Hedges
Many entities avoid hedge accounting due to its complexity and cost. Despite some targeted improvements, like the 2017-12 update, a stigma remains, especially for smaller entities. Notably, hedge accounting is mostly used by financial institutions, with some entities applying it selectively based on the simplicity of the risk (like interest rates or foreign currency).
Potential Paths Forward
Two potential paths were discussed: retaining the current model but allowing broader application (Path 1) or developing a single, comprehensive model (Path 2). Both have their pros and cons, with mixed views on which would be more beneficial.
Risk Mitigation Versus Risk Transformation
There was a preference for a model reflecting risk mitigation over risk transformation. The latter was seen as potentially broad and complex, possibly leading to speculative positions. A scalable model was suggested, fitting the model to the complexity of the hedging strategy.
🔍 Improving Disclosures
When it comes to disclosures, the opinions were varied. While some felt current disclosures are adequate, others pointed out their high cost and limited usefulness. The need for standardizing the information to model an entity’s performance was highlighted to increase comparability.
Hedge Disclosures
Council members suggested requiring disclosures by hedge type and developing an accounting model to support the most decision-useful information. Current disclosures are seen as too static, and a more dynamic view across an economic cycle was recommended.
📜 Implementation of Recent Standards
Council members shared their experiences with recent standards, from crypto assets to supplier finance programs. The general consensus was that the costs and operability of these standards matched expectations.
Crypto Assets
The standard on crypto assets received support, though challenges in determining fair value and principal market were noted. There were also calls for addressing digital assets outside the current scope.
Income Tax Disclosures and Segment Reporting
Income tax disclosure improvements were seen as challenging yet necessary, and segment reporting posed operational complexities. Despite these hurdles, the process of setting standards was commended.
