IFRS 9 Hedge accounting Introduction | Annualreporting.info

Currency SWAP operation

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 or downward movement of interest rates. However, they can also be used for fixed rate-for-fixed rate and floating rate-for-floating rate transactions.

Each side in the exchange is known as a counterparty. Currency SWAP operation

Currency SWAP operation

In a typical cross-currency … Read more

Natural disasters – Hedge accounting

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. 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 full or partially) or may not be expected to occur at all. Natural disasters – Hedge accounting

Entities consider whether any hedges of forecast transactions may cease to … Read more

Presentation – Cash flow hedges

The general mechanics of how ongoing cash flow hedges are presented does not change 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 IASB’s Conceptual Framework, an entity is not recognising an asset or liability that does not exist.

IFRS 9 is stricter than IAS 39 as to how the amount accumulated in the hedging reserve is subsequently accounted for, Read more

Objective of hedge accounting

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. Objective of hedge accounting

Applying the normal IFRS accounting requirements to those risk management activities can then result in accounting mismatches when the gains or losses on a hedging instrument are not recognised in the same period(s) and/or in the same place in Read more

Hedged items – General requirements

The general requirements of what qualifies as an eligible hedged item are unchanged compared to IAS 39. A hedged item can be:Hedged items - General requirements

Or Hedged items4 – General requir4ements Hedged items – General requirements Hedged items – Ge4neral requirements

  • A net investment in a foreign operation Hedged items – G4eneral requirements Hedged items – Gen4eral requirements

All of above can either be a single item or a group of items, provided the specific requirements for a group of items are met (see ‘Groups of items‘).

Only assets, liabilities, firm Read more

Hedges of exposures affecting OCI

Hedges of exposures affecting other comprehensive income Hedges of exposures affecting OCI

Only hedges of exposures that could affect profit or loss qualify for hedge accounting. The sole exception to this rule is when an entity is hedging an investment in equity instruments for which it has elected to present changes in fair value in OCI, as permitted by IFRS 9. Using that election, gains or losses on the equity investments will never be recognised in profit or loss.

For such a hedge, the fair value change of the hedging instrument is recognised in OCI. Ineffectiveness is also recognised in OCI. On sale of the investment, gains or losses accumulated in OCI are not reclassified to profit or loss.Read more