Overview

Accounting Standard AASB 2013-4, enacted in 2013, amends the Australian Accounting Standard AASB 139 Financial Instruments: Recognition and Measurement. This amendment was introduced to address the issue of how hedge accounting should be handled when a derivative is novated from one counterparty to a central counterparty due to legislative or regulatory changes. The Australian Accounting Standards Board (AASB) issued AASB 2013-4 in response to the International Accounting Standards Board's issuance of Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39) in June 2013. The primary objective of this amendment is to allow the continuation of hedge accounting under such circumstances, thereby maintaining the effectiveness and relevance of financial reporting in the face of regulatory changes.

Scope and Application

AASB 2013-4 applies to entities that prepare financial statements in accordance with Australian Accounting Standards, specifically targeting those that engage in financial instruments as defined in AASB 139. The amendments pertain to the continuation of hedge accounting for derivatives that are novated from one counterparty to a central counterparty due to regulatory requirements. This Act applies across Australia and is relevant to all entities that fall under the jurisdiction of the Australian Accounting Standards Board. There are no stated exclusions or exemptions within the scope of this legislation, though the applicability is limited to those financial instruments that meet the criteria of AASB 139. AASB 2013-4 extends its application through subordinate instruments, as it amends an existing Australian Accounting Standard, thereby affecting entities that adopt these standards in their financial reporting practices.

Key Provisions

AASB 2013-4, the Accounting Standard Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting, amends AASB 139 to permit the continuation of hedge accounting under specific circumstances (section 2). This amendment applies when a derivative instrument, designated as a hedging instrument, is novated from one counterparty to a central counterparty due to laws or regulations (section 2). The standard became effective for annual reporting periods beginning on or after 1 January 2014, although early application was permitted for periods starting between 1 January 2005 and 31 December 2013 (section 3). The AASB issued Exposure Draft ED 236 in March 2013, which was open to public comment for 19 days (section 4). The AASB received four submissions from Australian stakeholders, most of which were supportive of the proposed changes (section 4). A Regulation Impact Statement was not prepared as the amendments did not have a substantial impact on business or competition (section 5). Entities governed by AASB 2013-4 must ensure that if a derivative designated as a hedging instrument is novated from one counterparty to a central counterparty due to laws or regulations, they can continue to apply hedge accounting (section 2). This means that the continuity of hedge accounting is maintained under these specific circumstances, providing clarity and consistency in financial reporting (section 2). Compliance with these provisions requires careful documentation and assessment of the novated transactions to ensure they meet the criteria set out in the standard (section 2). Entities must also ensure that their accounting policies and practices are updated to reflect these amendments (section 2). Failure to comply with the requirements of AASB 2013-4 could result in misapplication of hedge accounting principles, leading to inaccurate financial reporting (section 2). While the standard itself does not specify penalties for non-compliance, entities that fail to adhere to the requirements may face scrutiny from regulatory bodies and potential financial penalties under broader accounting regulations (section 2). The implications of non-compliance could also include reputational damage and loss of investor confidence (section 2). Therefore, it is crucial for entities to understand and implement the provisions of AASB 2013-4 to avoid any adverse consequences (section 2).