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Financial Instruments
Part IV: Hedging
IFRS Foundation
2 2
33
Objective
Presentation and
Disclosure
Hedging instruments
Hedge accounting
(IFRS 9, Chapter 6)
Discontinuation
and rebalancing
Hedged items
Qualifying criteria
Accounting for
qualifying hedging
relationships
IFRS Foundation
Risk management
objective:
Accounting
objective
Represents in the
financial
statements the
effect of risk
management
Hedging instruments
Time value
Transactionrelated hedged
item, eg hedge
of a forecast
transaction
or
Time-period
related hedged
item, eg hedge
of an inventory
over period of
time
Option
Intrinsic value
Designate as
hedging
instrument
IFRS Foundation
Other
comprehensive
income
(accumulated in a
separate component
of equity)
Other
comprehensive
income
(accumulated in a
separate component
of equity)
Subsequent
measurement detailed rules
apply
Forward
element
Transactionrelated hedged
item, eg hedge
of a forecast
transaction
Spot element
Other
comprehensive
income
(accumulated in a
separate component
of equity)
or
Time-period
related hedged
item, eg hedge
of an inventory
over period of
time
Forward
contract
Designate as
hedging
instrument
IFRS Foundation
Other
comprehensive
income
(accumulated in a
separate component
of equity)
Subsequent
measurement detailed rules
apply
Qualifying items
Hedged items
Hedged items
Designation of hedged
item
Entire item
Component
Risk component
(Separately identifiable and
reliably measurable)
A component
comprises less
than the entire
fair value change
or cash flow
variability of an
item
Nominal component or
selected contractual
cash flows
Hedged item
Group of items
10
it consists of items
(including components of
items) that are,
individually, eligible
hedged items;
IFRS Foundation
Hedged items
11
Hedged items
Hedges of a group of items- nil net positions
12
Hedged items:
aggregated exposures
First hedging
relationship
Hedged item
1313
Second hedging
relationship
Hedged item
eg forecast purchase
Hedging
instrument
Hedging
instrument
eg futures contract
eg FX forward contract
Effectiveness
assessment
Measuring
hedge
ineffectiveness
Consider
combined
effect of items
14
IFRS Foundation
Qualifying criteria
15
Formal designation
and documentation
Economic relationship
between the hedged
item and the hedging
instrument exists
Hedge documentation
16
Economic
relationship
between the
hedged item
and hedging
instrument
1717
Hedge ratio
should be the
same as that
used for risk
management
Hedge effectiveness
18
Hedge effectiveness
Hedge
ineffectiveness
Categories of hedges
19
Fair value
hedge
Cash flow
hedge
Hedge of the exposure to variability in cash flows that is attributable to a particular risk
associated with all, or a component of, a recognised asset or liability (such as all or some
future interest payments on variable-rate debt) or a highly probable forecast transaction,
and could affect profit or loss.
Example: the use of a swap to change floating rate debt (whether measured at amortised
cost or fair value) to fixed-rate debt (ie a hedge of a future transaction in which the future
cash flows being hedged are the future interest payments).
Hedge of a
net
investment
in a foreign
operation
As defined in IAS 21 The Effects of Changes in Foreign Exchange Rates (amount of the
reporting entitys interest in the net assets of that operation)
IFRS Foundation
Hedge accounting
20
21
No
Yes
Yes
IFRS Foundation
22
If a hedging relationship is
rebalanced, the adjustment to
the hedge ratio can be effected
in different ways:
the weighting of the hedging
instrument can be increased
(which at the same time
reduces the weighting of the
hedged item) by:
23
IFRS Foundation
25
Hedge accounting
Whether the hedge accounting documentation provides
sufficient evidence to support the link between the
hedging relationship and the entitys risk management
objective.
Whether the hedging relationship meets the hedge
effectiveness requirements.
Assessing hedge effectiveness and determining hedge
ineffectiveness.
When a hedging relationship is rebalanced.
Determining when to discontinue hedge accounting.
IFRS Foundation
Disclosures
26
Hedge accounting
disclosures
Risk
management
strategy
Amount,
timing and
uncertainty
of future
cash flows
Effects of
hedge
accounting
on the
primary
financial
statements
Specific
disclosures
for dynamic
strategies
and credit
risk hedging
27
28
On initial recognition
o Allowed to consider the moment IAS 39 ceases to apply and the moment from
which the new model applies as one point in time
o For rebalancing, the starting point will be the hedge ratio used under IAS 39
(any gains or losses will be recognised in profit or loss)