How to hedge disclosures? IFRS 7 and Hedge Accounting - A first stocktaking

Abstract

Background and problem: Financial instruments are often highly complex. An effective financial presentation of the certain risks is therefore vital for the users’, especially for the investors’ understanding of financial reports for their decision-making processes. This is of special importance when it comes to hedge accounting and an understanding of the companies’ risk management policies, and how hedging affects the entities’ financial performances and risk situations. IASBs answer to this issue was the introduction of the IFRS 7 Financial Instruments: Disclosure, an accounting standard with the main goal to improve the quality of disclosed information, compulsory for all annual reports from 1st January 2007 onwards. Purpose: The purpose of this thesis is to explore how Swedish Large Cap entities have disclosed information regarding hedge accounting in their annual reports 2007, after the implementation of IFRS 7. Furthermore this thesis evaluates how the new hedge accounting disclosure requirements are perceived by the financial analysts. Delimitations: The thesis will only focus on that part which is presented in IFRS 7 regarding hegde accounting. The purpose is not to investigate how the companies use hedges, nor the quality of the disclosed information. Moreover, the thesis will only focus on the user’s perspective (investor). Method: A mix between a quantitive and qualitative method have been chosen in order to fulfill the purpose of the thesis. The quantitive method was used by conducting a disclosure study. The secondary data was collected from annual reports 2007. With a qualitative method, primary data was gathered from two telephone interviews with financial analysts and one accounting specialist. Conclusion: The findings and the analysis point out that for fair value hedges approximately 88 percent of the entities’ disclosure information correlated with IFRS 7 hedge accounting requirements. For cash flow hedges and hedges of net investments in foreign operations approximately 63 respective 81 percent of the entities provided information correlating with the requirements Even though, different correlations regarding the standard’s requirements and the information disclosed were identified, the interviewed financial analysts did not perceive those inconsistencies as important issues for their daily work, since hedge accounting disclosure were not considered as vital information sources. Suggestion on further research: It would have been interesting to conduct the same study for financial institutions since hedge accounting is more vital for their business. Furthermore, it would also be useful to evaluate the quality of the disclosed information, besides the quantitative aspects we have tested.