Cross-currency swap

In a currency swap operation, also known as a cross-currency swap, the parties involved agree under contract to exchange the following: the principal amount of a loan in one currency and the interest applicable on it during a specified period of time for a corresponding amount and applicable interest in a second currency.

Currency swaps are often used to exchange fixed-interest rate payments on debt for floating-rate payments; that is, debt in which payments can vary with the upward … Continue reading

Hedged item – Hedge of a net position

Q: When can an entity hedge a net position?

Considerations:
A EUR-functional currency entity has a sales department that sells certain items in USD. At the same time, the purchasing department buys certain products in USD. Each department is unaware of the other’s activities, but both want to hedge their forecast USD sales and purchases respectively. Assume that the sales department has USD100,000 of sales in six months’ time, so it enters into a forward contract with the entity’s central … Continue reading

Aggregate hedged item – Forecast issue of undecided currency debt

Q: Does IFRS 9 allow a highly probable forecast foreign currency debt issuance as eligible as a hedged item in a cash flow hedge of interest rate risk if the currency of issuance is not yet known?

Considerations:
At 1 January 200X, entity A, whose functional currency is the Euro, intends to issue a variable interest rate debt in six months’ time in order to finance future activities. Depending on the market conditions existing at 1 July 200X, entity A … Continue reading

Hedged item – Forecast Issue of FX debt

Q: Does IFRS 9 allow a highly probable forecast foreign currency debt issuance as being eligible as a hedged item in a cash flow hedge of foreign currency risk?

Considerations:

On 1 January 20X1, it is highly probable that company X (with EUR functional currency) will issue, on 1 July 20X1, USD 100 million of five–year, fixed–rate debt, with quarterly coupons. On 1 January 20X1, the EUR:USD spot and six–month forward exchange rates are 1:1. The proceeds from the issuance … Continue reading

Hedged item – Cash flow hedges – Future interest flows

Q: Does IFRS 9 allow the following cash flow hedge designations of future interest flows?

Considerations:
Consider the following cases. Note: In all scenarios both the swap and the hedged debt are denominated in Company A’s functional currency.

Case 1
Company A enters into a forward starting swap in which it pays a fixed rate and receives a floating interest rate to hedge a highly probable forecast debt issuance. The date of issuance is known, but it is not known … Continue reading

Hedged item – Risk components – Reliable measurement

Q: What evidences that changes in cash flows or fair value attributable to changes in a hedged component are reliably measurable?

Considerations:

To be eligible for designation as a hedged item, a risk component must be a separately identifiable component, and the changes in cash flows or fair value of the item attributable to change in that component must be reliably measurable (IFRS 9 paragraph B6.3.8).

Company A wishes to designate a risk component as a hedged item. … Continue reading

IFRS 9-The SPPI test explained by example!!!

The solely payments of principal and interest (SPPI) test requires that the contractual terms of the financial asset (as a whole) give rise to cash flows that are solely payments of principal and interest on the principal amounts outstanding ie cash flows that are consistent with a basic lending arrangement. Here are some examples to obtain an understanding for the IFRS reasoning:

Loan with zero interest and no fixed repayment terms

Relevant IFRS paragraphs [IFRS9.B4.1.7] – [IFRS Continue reading

Example IFRS 9 – Applying the ‘own use’ scope exemption

[IFRS 9.2 Scope]

The case:

Entity XYZ enters in to a contract to buy 100 tonnes of copper for CU200/tonne. The Coppercontract permits XYZ to take physical delivery of the copper at the end of 12 months or to settle net in cash, based on the difference between the spot price in 12 months’ time and CU200/tonne. Entity XYZ has a practice of settling net in cash (i.e. if the copper price at the end of year 1 is CU250/tonne, … Continue reading

Cash flows identification- Only Principal and interest

Cash flows solely payments of principal and interest on the principal amount

The following examples illustrate contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. For the context within IFRS 9: Financial Instruments, reference is made to IFRS 9 The Solely Payments of Principal and Interest Test (IFRS 9 The solely payments of principal and interest test).… Continue reading