Excellent Study IFRS 9 Eligible Hedged items

IFRS 9 Eligible Hedged items

the insured items of business risk exposures

Although the popular definition of hedging is an investment taken out to limit the risk of another investment, insurance is an example of a real-world hedge.

Every entity is exposed to business risks from its daily operations. Many of those risks have an impact on the cash flows or the value of assets and liabilities, and therefore, ultimately affect profit or loss. In order to manage these risk exposures, companies often enter into derivative contracts (or, less commonly, other financial instruments) to hedge them. Hedging can, therefore, be seen as a risk management activity in order to change an entity’s risk profile.

The idea of hedge accounting is to reduce (insure) this mismatch by changing either the measurement or (in the case of certain firm commitments) FRS 9 Eligible Hedged itemsrecognition of the hedged exposure, or the accounting for the hedging instrument.

The definition of a Hedged item

A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that

  1. exposes the entity to risk of changes in fair value or future cash flows and
  2. is designated as being hedged

The hedge item can be:

Only assets, liabilities, firm commitments and forecast transactions with an external party qualify for hedge accounting. As an exception, a hedge of the foreign currency risk of an intragroup monetary item qualifies for hedge accounting if that foreign currency risk affects consolidated profit or loss. In addition, the foreign currency risk of a highly probable forecast intragroup transaction would also qualify as a hedged item if that transaction affects consolidated profit or loss. These requirements are unchanged from IAS 39.

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1 Best Application of Hedge of forecast FX purchases

Hedge of forecast FX purchases

presents a complete descriptive case of a hedge, from start to finish. Step-by-step build a file to document a hedge and appropriately account for it under IFRS.

This narrative can also be used as a sort of starting point to the hedge documentation required for each hedging relationship at inception

The Case – Type of hedge: Cash flow hedge

Hedged risk: FX risk – spot component only

Key features: Spot rate designated, 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:Fair value hedge of fixed rate complete

  • 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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High level overview IFRS 9 Hedge accounting

High level overview IFRS 9 Hedge accounting

IFRS 9 Hedge accounting

Criteria to apply hedge accounting (all criteria must be met)

(i) Hedging Relationship

Must consist of:

  • Eligible hedging instruments
  • Eligible hedged items.

(ii) Designation and Documentation

Must be formalised at the inception of the hedging relationship, includes:

  • The hedging relationship
  • Risk management strategy and objective for undertaking the hedge
  • The hedged item and hedging instrument
  • How hedge effectiveness will be assessed.

(ii) Designation and Documentation

Must be formalised at the inception of the hedging relationship, includes:

  • The hedging relationship
  • Risk management strategy and objective for undertaking the hedge
  • The hedged item and hedging instrument
  • How hedge effectiveness will be assessed.

Eligible hedging instruments

Only those from contracts with EXTERNAL

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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

IFRS 9 Practical Hedge documentation template

This IFRS 9 Practical Hedge documentation template can be used as the basis for the formal documentation required by IFRS 9. However, every hedge is a specific transaction so changes should be made based on the actual situation to document. In section 9 there is room to add smaller additions and/or attachments to complete the hedge documentation at the required level.

1. Risk management objective and strategy

If not clear from the overall risk management strategy, include why the proposed hedging objective is consistent with the entity’s risk management strategy for undertaking hedges. Otherwise this section may make reference to the entity’s risk management department’s central documents.

2. Type of hedging relationship

☐ Fair value hedge  —–  ☐ Cash flow … Read more

Natural disasters Hedge accounting

Natural disasters Hedge accounting, how to deal with this combination, contracts go on but the business dies….. Here is how to report such issues under IFRS.

The natural disaster and potential subsequent events can disrupt many business transactions that may be postponed or cancelled. For example, entities may have been forecasting purchases of local goods or sales of their goods to local entities. Natural disasters Hedge accounting

Prior to the disaster, many such transactions may have constituted ‘highly probable’ hedged transactions in cash flow hedges under IFRS 9 Financial instruments (or IAS 39, if still applicable). However, purchases and sales that were considered highly probable a few weeks prior to the natural disaster, may no longer be highly probable (in … Read more

Presentation Cash flow hedges

Presentation Cash flow hedges is about the reporting lines in which cash flow hedges are included in the Statement of financial position, Statement of profit or loss and other comprehensive income.

Don’t forget about the hedge documentation and other qualifying criteria. The general mechanics of how ongoing cash flow hedges are presented has not changed compared with IAS 39. Entities would continue to accumulate in the hedging reserve (i.e., in equity, now in the standard called ‘cash flow hedge reserve’) the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item. This is often referred to as the ‘lower-of-test’ and basically assures that, in line with the Read more