Grouping similar hedging transactions

Grouping similar hedging transactions – It sometimes will be impractical (perhaps impossible) and not cost-effective for an entity to identify each individual transaction that is being hedged. An example is a group of sales or purchases over a period of time to or from one or more parties.

IFRS 9 permits an entity to aggregate individual forecasted transactions for hedging purposes in some circumstances. As it does for a hedge of a single forecasted transaction IFRS 9 requires that an entity identify the hedged transactions with sufficient specificity that it is possible to determine which transactions are hedged transactions when they occur.

For example, an entity that expects to sell at least 300,000 units of a particular product in its next fiscal quarter might designate the sales of the first 300,000 units as the hedged transactions. Alternatively, it might designate the first 100,000 sales in each month as the hedged transactions.

It could not, however, simply designate any sales of 300,000 units during the quarter as the hedged transaction because it then would be impossible to determine whether the first sales transaction of the quarter was a hedged transaction. Similarly, an entity could not designate the last 300,000 sales of the quarter as the hedged transaction because it would not be possible to determine whether sales early in the quarter were hedged or not.

Under the guidance in IFRS 9, a single derivative instrument of appropriate size could be designated as hedging a given amount of aggregated forecasted transactions, such as any of the following:

  1. Forecasted sales of a particular product to numerous customers within a specified time period, such as a month, a quarter, or a year, Grouping similar hedging transactions
  2. Forecasted purchases of a particular product from the same or different vendors at different dates within a specified time period, rouping similar hedging transactions
  3. Forecasted interest payments on several variable-rate debt instruments within a specified time period. Grouping similar hedging transactions

At the time of hedge designation only, the transactions in each group must share the risk exposure for which they are being hedged. For example, the interest payments in the group in (c) in the preceding paragraph shall vary with the same index to qualify for hedging with a single derivative instrument. Grouping similar hedging transactions

For a group (rather than an individual transaction) to be designated as the hedged transaction, the transactions must share the same risk exposure for which they are being hedged. The analysis to determine whether transactions share the same risk exposure in a cash flow hedge is generally qualitative. Grouping similar hedging transactions

Similar to a single forecasted transaction, a group of transactions must be identified with sufficient specificity so that it is possible to determine which transactions are the hedged transactions when they occur. The specifically identified group of transactions may be: Grouping similar hedging transactions

  • a specific group of assets or liabilities for which the forecasted transaction relates; or Grouping similar hedging transactions
  • the first cash flows received or paid up to a specific amount in a particular period (without reference to the specific asset or liability). Grouping similar hedging transactions

For example, an entity expects to sell at least 300,000 units of a particular product in its next fiscal quarter. Grouping similar hedging transactions

Grouping similar hedging transactions

The entity could not designate any sales of 300,000 units during the quarter as the hedged transaction because it would be impossible to determine whether an individual sale during the quarter was a hedged transaction. In addition, the entity could not designate the last 300,000 sales because it would not be possible to determine whether sales during the quarter were hedged until the quarter had ended. Grouping similar hedging transactions

General model of measurement of insurance contracts

Grouping similar hedging transactions

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