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Financial Instruments – Towards a new model for DRM

Financial Instruments – Towards a new model for DRM

This IFRS newsletter reports on the IASB's November discussions on financial instruments.

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We report on the IASB’s discussions at its November meeting.

Towards a new model for DRM 

The Board agreed that the accounting model for dynamic risk management (DRM) should improve transparency, address the capacity issue and provide a simple and reliable performance metric while reflecting the fluid nature of DRM. 

The staff presented two accounting approaches where derivatives are used to align the asset profile with the target profile and recommended the approach based on cash flow hedge mechanics.

The Board did not make any decisions, but directed the staff to concentrate their effort on further developing the model based on cash flow hedge mechanics and begin involving preparers and users of financial statements in their discussions at an early stage. 

 

“We support the IASB’s plan to explore a model for dynamic risk management along the lines of cash flow hedge accounting.”

Chris Spall KPMG’s global IFRS financial instruments leader

For more detail on the discussions, read Issue 43 of our IFRS Newsletter: Financial instruments (PDF 1 MB).

Objectives of the proposed model explained

The objectives of developing a new model are to improve information provided about risk management and, more specifically, to faithfully represent the impact of a bank’s DRM activities on its financial statements. To achieve this aim, the staff believed that the model should focus on the following areas:

  • Transparency
  • Capacity
  • Fluid nature
  • Performance measurement. 

Two approaches presented by the staff

The staff have considered the following two accounting approaches, based on the alternatives for designating an interest rate hedging relationship under current IFRS.

  • Cash flow hedge mechanics
  • Fair value hedge mechanics 

The staff supported the approach based on cash flow hedge mechanics because it would better reflect the nature of DRM activities and have a stronger conceptual basis. In light of the arguments set out by the staff, the Board also preferred that approach – on the basis that it would be less complex and easier to explain than the alternative approach as well as broadly consistent with the principles in IFRS 9 and the Conceptual Framework.

The Board did not make any decisions, but directed the staff to concentrate their efforts on further developing the model based on cash flow hedge mechanics. 

Find out more

Visit our IFRS Newsletters page for the latest discussions on these issues.

And go to our IFRS – Financial Instruments hot topics page for more on these and other aspects of financial instruments accounting under IFRS. 

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