Consider an entity that hedges foreign currency risk on a net basis. It has a foreign currency sale of FC100 and purchase of FC(80). It would usually hedge the net exposure FC20, but under IAS-39, you need to designate a specific instrument. Now, the entity has 3 options
- Artificially split the sale contract of FC 100 into FC80 and FC20(hedging FC-20). This can be accounted but does not represent the 'substance' of hedging the net transaction
- Even (1) is not possible when maturity mismatches occur
- Enter into two equivalent forwards whose net value is 20
The options accounting under IAS-39 discussed in an earlier post also prompts using other non-efficient instruments to achieve the desired result.
Impact This may make banks happy but the corporates spend more. Secondly, and maybe more importantly, the capital markets are boosted by 'false'\'economically unnecessary' transactions. Making markets efficient by such means are avoidable.