1. EFRAG’s final position on the IASB Exposure Draft Hedge Accounting Comment letter 11 March 2011

2. EFRAG position EFRAG agrees with The hedge accounting model proposed in the ED provides a number of significant improvements that will make hedge accounting more accessible. The direction of the proposed objective, to reflect the extent an entity’s risk management activities in the financial reporting has the benefit of being consistent with the role of the business model in the classification of financial instruments. The proposals remove a number of important restrictions to hedge accounting that exist in IAS 39. Although we believe that certain remaining restrictions that should be lifted (e.g. regarding non-contractually specified inflation risk, credit risk, risks not affecting profit or loss and sub-LIBOR components). There are important improvements relating to assessing hedge effectiveness and the possibility to apply hedge accounting to components of non-financial items. The proposals have introduced new complexities, particularly in the rebalancing of hedge relationships, but we believe that the benefits of the new approach outweigh the cost and complexity. EFRAG’s overall assessment 2

3. EFRAG position EFRAG has a number of concerns EFRAG believes that certain remaining restrictions on the eligibility of hedged items and hedging instruments should be lifted. Moreover entities may have valid risk management activities in place that may not be represented under the proposed hedge accounting model, either because they do not meet the qualifying criteria or because the strategy is neither strictly a fair value hedge or a cash flow hedge. The IASB should not finalise a standard on the general hedge accounting model prior to developing a model for macro hedging. The proposals bring in important new concepts and definitions that are not well understood which creates considerable uncertainty around the operationality of the proposed new model. Nevertheless, in EFRAG’s view mandatory rebalancing and prohibition of voluntary discontinuation are necessary conditions to support a hedge accounting framework. As the proposals require the application of more judgement than IAS 39, disclosures should help users to understand the overall risk management strategies of an entity. Although the proposed disclosure objectives are appropriate, we have certain concerns about their prescriptive nature. EFRAG believes the IASB will need to consider the entire package of proposals relating to the revision of IAS 39 before finalising the resulting standards. EFRAG’s overall assessment (continued) 3

4. EFRAG position Proposed objective of hedge accounting EFRAG agrees with the direction of the proposed objective to reflect, in the financial reporting, the extent and effects of an entity’s risk management activities. The IASB should consider strengthening the objective by explicitly stating that, when an entity applies hedge accounting, the resulting financial reporting better reflects the economic effects of the risk management activities than would otherwise be the case. We do not believe that hedge accounting should be restricted to risks that affect profit or loss only. We therefore urge the IASB to reconsider carefully why it is necessary to prohibit hedge accounting for items that affect other comprehensive income or equity as well. Objective of hedge accounting (Question 1) 4

5. EFRAG position Non-derivative instruments at fair value through profit or loss EFRAG agrees that a non-derivative financial asset and a non-derivative financial liability measured at fair value through profit or loss should be eligible as hedging instruments, because it enables an entity to align its hedge accounting closer to its risk management objectives. Non-derivative instruments not at fair value through profit or loss EFRAG believes that there is no conceptual basis for excluding as eligible hedging instruments any non-derivative financial instruments that are not at fair value through profit or loss. Eligibility of non-derivative financial instruments (Question 2) 5

6. EFRAG position Derivatives as hedged items EFRAG agrees that a synthetic exposure may be designated as a hedged item. EFRAG believes this proposal will eliminate a significant unnecessary restriction of IAS 39 that should contribute to aligning hedge accounting with actual risk management practices. Derivatives as hedged items (Question 3) 6

7. EFRAG position Risk components eligible hedged items EFRAG welcomes the proposal to allow the designation of a risk component as a hedged item if it is separately identifiable and measurable. Non- contractual risk components We question why non-contractually specified inflation cannot be designated as a component and urge the IASB to reconsider this issue. Sub-LIBOR components We believe that the IASB should consider permitting hedging relationships to be designated when the effective interest rate of a financial instrument is below a benchmark interest rate (for example, sub-LIBOR). Risk components (Question 4) 7

8. EFRAG position Layer components as hedged items EFRAG agrees that an entity should be allowed to designate a layer of the nominal amount of an item as the hedged item, as this will allow entities to align their financial reporting closer to their risk management strategies. Layers as hedged items (Question 5) 8

9. EFRAG position Hedge effectiveness testing EFRAG welcomes the removal of the 80 to 125 per cent bright line test for assessing and measuring hedge effectiveness. The elimination of this requirement would simplify implementation of hedge accounting and align it more closely to an entity’s risk management strategy. IneffectivenessWe are concerned about potential inconsistencies that the proposed method of assessing effectiveness and measuring ineffectiveness may create between risk management and accounting. For example, it may be possible to demonstrate that a hedge will be 100 per cent effective at maturity. Nevertheless, if the hedged item and the hedging instrument are traded in markets with different degrees of liquidity then there may still be hedge ineffectiveness for accounting purposes during the life of the hedge. We believe that, in line with the objective for hedge accounting, the hedge ineffectiveness that is recognised in profit or loss should be determined in accordance with risk management practices. Hedge effectiveness (Question 6) 9

10. EFRAG position Notion of rebalancing EFRAG agrees with the notion of ‘rebalancing’ hedging relationships, because this enables an entity to reflect in hedge accounting the changes in hedge ratio that it makes for risk management purposes without discontinuing and restarting the hedge relationship. OperationalityHowever we noted that the notion of rebalancing and its interaction with the notion of hedge discontinuation are not well understood. This creates considerable uncertainty around the operationality of the proposed new model. To address these concerns and make the future standard more robust, we believe the IASB should consider: clarifying the drafting of the key concepts and definitions; making the redrafted proposals publicly available to constituents for comments; and testing the operationality of the proposals in practice. Rebalancing (Question 7) 10

11. EFRAG position Discontinuation criteria EFRAG agrees that an entity should discontinue hedge accounting prospectively only when the hedging relationship (or part of a hedging relationship) ceases to meet the qualifying criteria. EFRAG agrees that an entity should not be permitted to discontinue hedge accounting for a hedging relationship that still meets the risk management objective and strategy, and that continues to meet the qualifying criteria. Internal derivatives We agree that internal derivatives are not eligible hedging instruments in the consolidated financial statements of a group because they are not transactions with external parties. Many institutions use internal derivatives in the practical implementation of their risk management strategies. We therefore believe that the Board should give further consideration as to how internal derivatives might be incorporated more effectively into the hedging model, perhaps through appropriate designation of portfolios of external derivatives as hedged items. Discontinuation (Question 8) 11

12. EFRAG position Two-step approach EFRAG acknowledges that the proposed presentation of fair value hedges would show the effect of hedging transactions in a single place of the financial statements. However, we fail to see what additional information this would provide to users of financial statements. EFRAG proposes alternative We believe that instead of requiring presentation on a gross and disaggregated basis in the statement of financial position, we would recommend that all fair value changes be aggregated into a single line item in the statement of financial position and to provide details in the notes. Linked presentation EFRAG does not support linked presentation where gross assets and gross liabilities that are related by way of a fair value hedge are presented together on the same side of the statement of financial position. Accounting for fair value hedges (Question 9) 12

13. EFRAG position IneffectivenessEFRAG welcomes the proposals, which address the issue of ineffectiveness due to the time value component in options and provide a solution to an important practical issue. Reclassification from other comprehensive income to profit or loss The Board should consider a single approach for the reclassification to profit or loss of the time value component accumulated in equity. EFRAG believes that an allocation over the relevant period on a rational basis would be the most appropriate method. Reclassification directly out of equity The option to reclassify the amount directly out of equity without affecting other comprehensive income creates a new category of transactions in the statement of equity that do not represent a transaction with the owners. Time value of options (Question 10) 13

14. EFRAG position Macro hedgingEFRAG will not be able to comment in full on the criteria for the eligibility of groups of items as a hedged item until we gain a better understanding of the Board’s direction in respect of macro hedging. Underlying principle We observe that some restrictions will be maintained in the general hedging model for closed groups of hedged items and the rationale for these restrictions is not always clear. We believe that further outreach and field-testing should be undertaken to avoid replacing one set of complex, rules-based, requirements with another. Groups as hedged items (Question 11) 14

15. EFRAG position Hedge of net position of offsetting items – Presentation in profit or loss EFRAG agrees with the proposals regarding the presentation in profit or loss of the effects of hedge accounting for groups of items. Presentation in the statement of financial position EFRAG disagrees with the way gains or losses from fair value hedges of net positions are proposed to be presented in the statement of financial position. Rather than requiring presentation on a gross and disaggregated basis in the statement of financial position, we would recommend that all fair value changes be aggregated into a single item in the statement of financial position and to provide details in the notes. Presentation of hedged groups (Question 12) 15

16. EFRAG position Understand risk management strategy and hedging activities EFRAG supports the categories of disclosures proposed in the ED. We believe that disclosures play a fundamental role in providing users with an understanding of an entity’s risk management strategy and hedging activities. Prescriptive nature of the disclosures and interaction with IFRS 7 We are concerned about the prescriptive nature of the disclosure requirements. Furthermore we find it difficult to understand how the proposals would interact with the disclosure requirements of IFRS 7. Disclosures (Question 13) 16

17. EFRAG position Derivative accounting EFRAG supports the proposal that derivative accounting would apply to contracts that would otherwise meet the ‘own-use’ scope exception if that is in accordance with an entity’s risk management strategy. We note that these proposals do not address the concerns of entities that manage the price risk on their entire flow of goods on a fair value basis. We believe that the IASB should take a more holistic approach to the underlying concerns and address these as part of a separate project. “Own use” exception (Question 14) 17

18. EFRAG position Credit risk as eligible hedged item EFRAG believes that the IASB should develop a principles-based standard without adding rules to outlaw specific components. Where the hedged item is credit risk, there is not any inherent reason to prevent hedge accounting per se and hedge accounting should be permitted provided that the hedging relationship meets the general requirements for qualification and is consistent with the risk management activities. We acknowledge this may be difficult to achieve in practice. Therefore, we support the IASB in its efforts to investigate further the development of the proposed accounting alternatives. AlternativesEFRAG supports the IASB in its efforts to investigate further the development of accounting alternatives. Constituents have raised several alternatives which are different from those proposed by the IASB, and we have communicated these alternatives to the IASB Staff. Credit derivatives and hedging (Question 15) 18

19. EFRAG position Effective dateEFRAG supports the effective date of 1 January 2015 at the earliest for all phases of IFRS 9 and other major projects currently under consideration by the IASB. Transitional provisions EFRAG supports prospective application of the proposals. Transition (Question 16) 19