High level overview IFRS 9 Hedge accounting

High level overview IFRS 9 Hedge accounting

OBJECTIVE

The objective of hedge accounting is to represent, in the financial statements, the effect of an entity’s risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss (or other comprehensive income, in the case of investments in equity instruments for which an entity has elected to present changes in fair value in other comprehensive income).

SCOPE

A hedging relationship qualifies for hedge accounting only if all the following criteria are met:

  1. the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
  2. at the inception of the hedging relationship there is formal designation and documentation of the hedging
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Commodity finance IFRS the 6 best examples

Commodity finance IFRS the 6 best examples – A key issue is whether the contract to deliver a non-financial item (the commodity) falls within the scope of IFRS 9 Financial Instruments. Although IFRS 9 would appear to apply only to financial assets and financial liabilities, certain contracts for non-financial items are also within its scope.

The scope of IFRS 9

In determining whether the transaction is within the scope of IFRS 9, key guidance is set out in IFRS 9 2.4. IFRS 9 2.4 notes that

This Standard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash or in another financial instrument, or by exchanging financial instruments, Read more

Weather derivative accounting

Weather derivative accounting – The weather has an enormous impact on business activities of many kinds and varies both geographically and seasonally. Sellers of weather derivatives use the instruments to hedge their own risks and to make trading profits. Just as a firm can manage its currency exposure, so it can hedge its weather exposure.

Contract concepts

A weather derivative is a contract between two parties that stipulates how payment will be exchanged between the parties, depending on certain meteorological conditions during the contract period. Weather derivatives are usually structured as swaps, futures and call or put options based on different underlying weather indices. Weather derivative accounting

Weather derivatives have one major difference from traditional derivatives. In contrast to traditional … Read more

6 Risk management safe in the digital age

6 Risk management safe in the digital age – Following the maturation and success of bitcoin futures introduced by Chicago Mercantile Exchange’s (“CME”) Group in December 2017 and in response to growing customer demand for additional regulated bitcoin derivative products, CME is launching Options on Bitcoin futures on January 13, 2020.

The value of options on Bitcoin futures is based on the regulated CME CF Bitcoin Reference Rate (BRR) and settles into actively traded Bitcoin futures. Read the FAQ on CME’s Bitcoin options. Watch the videos to learn more on how CME’s Bitcoin contracts work and how they can be used. 6 Risk management safe in the digital age

The bitcoin futures are cash-settled and based on a once-a-day reference … Read more

Clear IFRS 9 Fair value hedge accounting

Clear IFRS 9 Fair value hedge accounting – The fair value hedge is one of three hedges defined in IFRS 9, the others are the cash flow hedge and the hedge of a net investment.

Hedge accounting can bring a number of advantages over traditional accounting methods. The core benefit is that by addressing the timings mismatch associated with standard derivative accounting, hedge accounting removes temporary volatility from the P&L. As a result, the financial statements will better reflect the company’s true economic performance.

Reducing the volatility in earnings results in a number of additional benefits:

  • Enterprise value. Earnings volatility is negatively perceived by investors.
  • Creditworthiness. Predictability in future earnings is a positive factor in creditworthiness.
  • Risk
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Net investment hedge

The net investment hedge is one of three hedges defined in IFRS 9, the others are the fair value hedge and the cash flow hedge.

Hedge accounting can bring a number of advantages over traditional accounting methods. The core benefit is that by addressing the timings mismatch associated with standard derivative accounting, hedge accounting removes temporary volatility from the P&L. As a result, the financial statements will better reflect the company’s true economic performance.

Reducing the volatility in earnings results in a number of additional benefits:

  • Enterprise value. Earnings volatility is negatively perceived by investors.
  • Creditworthiness. Predictability in future earnings is a positive factor in creditworthiness.
  • Risk management. Statements reflect better and more accurately how
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Cash flow hedge

The cash flow hedge is one of three hedges defined in IFRS 9, the others are the fair value hedge and the hedge of a net investment.

Hedge accounting can bring a number of advantages over traditional accounting methods. The core benefit is that by addressing the timings mismatch associated with standard derivative accounting, hedge accounting removes temporary volatility from the P&L. As a result, the financial statements will better reflect the company’s true economic performance.

Reducing the volatility in earnings results in a number of additional benefits:

  • Enterprise value. Earnings volatility is negatively perceived by investors.
  • Creditworthiness. Predictability in future earnings is a positive factor in creditworthiness.
  • Risk management. Statements reflect better and more accurately
Read more

Embedded derivatives Equity kicker

Embedded derivatives Equity kicker – A more specific type of embedded derivative that is often found in practice relates to a type of funding provided by venture capital entities is the equity kicker. It is many times part of a sales of a part of a business of a listed company, financed by the venture capital entity. The intention is to prepare the separated business for an IPO within 3 – 5 years after this separation. Embedded derivatives Equity kicker

Example Mezzanine financing Equity kicker

A venture capitalist provides a subordinated loan, that in addition to interest and repayment of principal, contains terms that entitle the venture capitalist to receive shares of the borrower (separated business) free of charge or … Read more

Hedge accounting

Hedge accounting – What is this all about?

If investors purchase a security that comprises a high level of risk, they may accompany the purchase with an opposing item (usually a derivative, such as an option or future contract) referred to as a hedge.

This hedge experiences gains in value when the corresponding security (or ‘underlying asset’) sustains losses.

Under traditional accounting practices, a security and its hedge are treated as separate components when priced. Hedge accounting treats them as a single accounting entry that reflects the combined market values of the security and the hedge.

For example, suppose an investor, Jane, holds 10 shares of stock ABC priced at $10 each, worth a total of $100. Hedge accounting

To … Read more

IFRS 9 Inflation as a risk component

Inflation as a risk component – Under IAS 39, inflation cannot be designated as a hedged risk component for financial instruments, unless the inflation risk component is contractually specified. For non-financial instruments, inflation risk cannot be designated under IAS 39 as a risk component at all. Inflation as a risk component

Highlight – For financial instruments, IFRS 9 opens the door for designating a non-contractually specified inflation component as a hedged risk component – but only in limited circumstances. For non-financial instruments, the inflation component will be eligible for designation as the hedged item in a hedging relationship provided that it is separately identifiable and reliably measurable. Inflation as a risk component

For financial instruments, IFRS 9 introduces a rebuttable Read more