Disclosures Hedges Financial position

Disclosures Hedges Financial position – Effect on the financial position and performance

IFRS 7 sets out a specific requirement to disclose the effect hedge accounting has on the entity’s financial position and the performance. All disclosures are required in a tabular format and by type of risk. Disclosures Hedges Financial position

Instead of reproducing the specific requirements of IFRS 7 we provide examples below of how those disclosures might look.

Worked example – Illustrative disclosure of the effects of hedge accounting on the financial position and performance 

The impact of hedging instruments designated in hedging relationships as of 31 December 20×0 on the statement of financial position of Alpha Beta Coffee Group (the Group) is, as follows:

Disclosures Hedges Financial position

The impact of hedged items designated in hedging relationships as of 31 December 20×0 on the statement of financial position of the Group is, as follows:

Disclosures Hedges Financial position

Disclosures Hedges Financial position Disclosures Hedges Financial position Disclosures Hedges Financial position Disclosures Hedges Financial position

Disclosures Hedges Financial position

The above hedging relationships affected profit or loss and other comprehensive income, as follows:

Disclosures Hedges Financial position

IFRS 7 further requires a reconciliation of the components in equity that arise in connection with hedge accounting (such as the hedging reserve) and an analysis of OCI. That information needs to be disaggregated by risk category, which can be done in the notes.

Disclosure requirements of IFRS 7

IFRS requires certain disclosures to be presented by category of instrument based on the IAS 39 measurement categories (see below IFRS 7 8). Certain other disclosures are required by class of financial instrument. For those disclosures an entity must group its financial instruments into classes of similar instruments as appropriate to the nature of the information presented. [IFRS 7 6]

The two main categories of disclosures required by IFRS 7 are: Disclosures Hedges Financial position

  • information about the significance of financial instruments. Disclosures Hedges Financial position
  • information about the nature and extent of risks arising from financial instruments Disclosures Hedges Financial position

Information about the significance of financial instruments – Statement of financial position

Disclose the significance of financial instruments for an entity’s financial position and performance. [IFRS 7 7]

This includes disclosures for each of the following categories: [IFRS 7 8]

  • Financial assets measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition
  • held-to-maturity investments Disclosures Hedges Financial position
  • loans and receivables Disclosures Hedges Financial position
  • available-for-sale assets Disclosures Hedges Financial position
  • financial liabilities at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition
  • financial liabilities measured at amortised cost

Effect on financial position and performance – Hedged item

Disclose, in a tabular format (see the example below), the following amounts related to hedged items separately by risk category for the types of hedges as follows.

Fair value hedges

−− The carrying amount of the hedged item recognised in the statement of financial position, separating assets from liabilities.
−− The accumulated amount of fair value hedge adjustments on the hedged item included in the above carrying amount.
−− The location of the hedged item in the statement of financial position.
−− The change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period.
−− The balance of fair value hedge adjustments remaining in the statement of financial position for any hedged items that have ceased to be adjusted for hedging gains and losses.

Cash flow hedges and hedges of a net investment in a foreign operation

−− The change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period.
−− The balances in the cash flow hedge reserve and the foreign currency translation reserve for continuing hedges.
−− The balances remaining in the cash flow hedge reserve and the foreign currency translation reserve from any hedging relationships for which hedge accounting is no longer applied.

Disclosures Hedges Financial position

Effect on financial position and performance – Hedge ineffectiveness and hedging gains or losses

Disclose, in a tabular format (see the example below), the following amounts related to hedged items separately by risk category for the types of hedges as follows.

Fair value hedges

−− Hedge ineffectiveness – i.e. the difference between the hedging gains or losses of the hedging instrument and the hedged item – recognised in profit or loss (or OCI for hedges of an equity instrument for which an entity has elected to present changes in fair value in OCI).
−− The location of the recognised hedge ineffectiveness in the statement of profit or loss and OCI.

Cash flow hedges and hedges of a net investment in a foreign operation

−− Hedging gains or losses of the reporting period that were recognised in OCI.
−− Hedge ineffectiveness recognised in profit or loss.
−− The location of the recognised hedge ineffectiveness in the statement of profit or loss and OCI.
−− The amount reclassified from the cash flow hedge reserve or the foreign currency translation reserve into profit or loss as a reclassification adjustment (see IAS 1 Presentation of Financial Statements), differentiating between:
– amounts for which hedge accounting has previously been used, but for which the hedged future cash flows are no longer expected to occur; and
– amounts that have been transferred because the hedged item has affected profit or loss.

−− The location of the reclassification adjustment (see IAS 1) in the statement of profit or loss and OCI.
−− For hedges of net positions, the hedging gains or losses recognised in a separate line item in the statement of profit or loss and OCI.

Disclosures Hedges Financial position

Disclosures Hedges Financial position

Effect on financial position and performance – Reconciliation

Either in the statement of changes in equity or in the notes to the financial statements, provide a reconciliation of accumulated OCI in accordance with IAS 1, separately by risk category.

The reconciliation should differentiate, at a minimum, between:
−− hedging gains or losses of the reporting period that were recognised in OCI in respect of cash flow hedges and hedges of a net investment in a foreign operation;
−− the amount reclassified from the cash flow hedge reserve or the foreign currency translation reserves into profit or loss as a reclassification adjustment (differentiating between amounts for which hedge accounting was previously used but for which the hedged future cash flows are no longer expected to occur, and amounts that have been transferred because the hedged item has affected profit or loss);
−− the amount removed from the cash flow hedge reserve and included directly in the initial cost or other carrying amount of:
– a non-financial asset or a non-financial liability that is recognised subsequent to a hedged forecast transaction; or
– a firm commitment that results from a hedged forecast transaction for a non-financial asset or non-financial liability for which fair value hedge accounting is applied;
−− the amount reclassified from the cash flow hedge reserve into profit or loss as a reclassification adjustment in relation to a loss (or a portion of it) that the entity does not expect to recover in one or more future periods;

−− the amounts associated with the time value of purchased options that hedge transaction-related hedged items and amounts associated with the time value of purchased options that hedge time period-related hedged items (when an entity designates as the hedging instrument only the change in intrinsic value of the option); and
−− the amounts associated with the forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge transaction-related hedged items and amounts associated with the forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge time period-related hedged items (when an entity designates as the hedging instrument only the change in the value of the spot element of the forward contract or excludes the foreign currency basis spread).

Effect on financial position and performance – Credit exposures designated at FVTPL

If a financial instrument, or a proportion of it, is designated as at FVTPL because a credit derivative is used to manage the credit risk of that instrument, then disclose:
−− a reconciliation of each of the nominal amount and the fair value at the beginning and end of the period of the credit derivatives that have been used to manage the credit risk;
−− the gain or loss recognised in profit or loss on designation of a financial instrument (or a proportion of it) as measured at FVTPL; and
−− on discontinuation of measuring a financial instrument (or a proportion of it) at FVTPL, that financial instrument’s fair value that has become the new carrying amount and the related nominal or principal amount.

Disclose separately the carrying amount of the financial instruments that have been so designated, either in the statement of financial position or in the notes.

If an entity uses a credit derivative to manage the credit risk of a financial asset and designates the financial asset as measured at FVTPL, then it discloses the following.
−− The maximum exposure to credit risk of the financial asset (or group of financial assets) at the reporting date.
−− The amount by which any related credit derivatives mitigate that maximum exposure to credit risk.
−− The amount of change, during the period and cumulatively, in the fair value of the financial asset (or group of financial assets) that is attributable to changes in the credit risk.
−− The amount of change in the fair value of any related credit derivative that has occurred during the period and cumulatively since the financial asset was designated.

Disclosures Hedges Financial position

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