Financial Instruments – DRM discussions continue | KPMG | GLOBAL

Financial Instruments – DRM discussions continue

Financial Instruments – DRM discussions continue

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

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

DRM discussions continue

The IASB staff presented an education session to the Board in which it discussed:

  • prepayment risk and ways to manage it; and 
  • hedge accounting and capacity. 

The Board did not make any decisions, but generally agreed with the staff’s observations and summary. Depending on the progress of the Board’s discussions, possible future outcomes might include the issue of a second discussion paper on the subject or the issue of an exposure draft.

 

“Addressing prepayment risk and core deposits will be key to developing an accounting solution for dynamic risk management.”

Chris Spall, KPMG’s global IFRS financial instruments leader

 

 

For more detail on the discussions, read Issue 42 of our IFRS Newsletter: Financial Instruments (PDF 1 MB). 

Prepayment risk and ways to manage it

The staff provided an overview of prepayment risk in the context of DRM and noted that in some lending arrangements, borrowers can choose to prepay certain loans. The staff noted that because of these prepayment features, an assumption cannot be made that asset portfolios would exist from origination to contract maturity.

The staff explained that prepayment risk results in net interest margin (NIM) repricing earlier than expected and since the objective of DRM is to manage how NIM reprices, DRM should therefore also consider prepayment risk. 

Hedge accounting and capacity

The staff provided examples of the application of hedge accounting in both a non-banking and banking environment with a particular focus on how the relevant risk management activities are reflected in the financial statements. 

The staff discussed the concept of ‘capacity’ with reference to the hedge accounting examples presented and pointed out that – in this context – capacity relates to items that are eligible for designation for hedge accounting purposes. 

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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