The IASB's Discussion Paper on Accounting for Dynamic Risk Management - Evaluation of Comment Letters

Abstract

Accounting for financial instruments has been under discussion since more than 20 years. Especially the International Accounting Standards Board (IASB) and its predecessor has been seeking to develop an accounting solution that allows entities to better depict dynamic risk management in their financial statements, for example in the context of interest rate risk managed by a bank’s treasury department. Portfolios being hedged as open and dynamic groups for economic purposes are currently forced into closed and static hedges for accounting purposes. This leads to a periodical need for re-designations, thereby introducing complexity as well as ineffectiveness (cf. IFRS Foundation (ed.) (2010), p. 2). On April 17th 2014, the IASB published the Discussion Paper (DP) on Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging as a next step in relation to its Dynamic Risk Management Project. The DP contains an entirely new accounting concept for dynamic risk management, namely the Portfolio Revaluation Approach (PRA). According to this concept, dynamically managed positions included in the PRA would be revalued for changes in the managed risk through profit and loss while risk management instruments would be measured at fair value through profit and loss (FVTPL). The net effect on profit and loss of both measurements would capture the overall success of an entity’s dynamic risk management. The DP also contains further significant elements, for example elements of behaviouralisation which are common practice in risk management but challenging to display within an accounting framework. From publication in April until October 17th 2014 the public was invited to submit comment letters and thereby answer up to 26 questions posted by the IASB. During this period 123 letters were submitted which are publicly available at the IASB’s website. Despite some publications summarizing commentators’ aggregated views as well as brief descriptions of reasoning regarding the important topics (on this see for example Hori, H./Ah Kun, A. (2015), there was not created sufficient transparency on the outcome of this comment period. This research paper aims to contribute to further transparency by analyzing all submitted comment letters with respect to the most significant questions. On the one hand, this analysis will be conducted quantitatively by stating clearly the outcome of these questions, thereby carving out respondents’ preponderant views. On the other hand, major arguments will comprehensively be discussed, especially where views differ.