Groups of items hedging, designation of layer components these are relevant for a practical risk management process to base hedge accounting on. Hedge accounting under IAS 39 was primarily designed from a single instrument viewpoint, and therefore less effective to apply. A hedging relationship would typically include a single hedging instrument (e.g., an interest rate swap) hedging a single item (e.g., a loan). However, for operational reasons entities often economically hedge several items together on a group basis. IAS 39 allows several items to be hedged together as a group, but there are restrictions such that there are relatively few types of groups that are eligible as hedged items.
In an effort to address the issues raised by these restrictions, the IASB has broadened the eligibility criteria for groups of items in IFRS 9.
General requirements IAS 39 vs IFRS 9
Under IAS 39, a group of items is eligible as a designated hedged item for accounting purposes only if:
- The individual items within the group share the same designated risk exposure.Groups of items Hedging
- The change in the fair value attributable to the hedged risk for each individual item in the group is ‘approximately proportional’ to the overall change in the fair value attributable to the hedged risk of the group. Groups of items Hedging
Many hedges will fail to fulfill the second criterion. For example, when hedging a portfolio of shares that replicates a market index, the individual shares would usually not move in tandem with the entire portfolio. Groups of items Hedging
In contrast, under IFRS 9, hedge accounting may be applied to a group of items if: Groups of items Hedging
- The group consists of items or components of items that would individually qualify for hedge accounting. Groups of items Hedging
- For risk management purposes, the items in the group are managed together on a group basis. Groups of items Hedging
Hedging a portfolio of shares
An entity holds a portfolio of shares of Swiss companies that replicates the Swiss Market Index (SMI). The entity elected to account for the shares at fair value through other comprehensive income (FVTOCI), as allowed by IFRS 9. The entity decides to lock in the current value of the portfolio by entering into corresponding SMI futures contracts.
The individual shares would be eligible hedged items if hedged individually. As the objective of the portfolio is to replicate the SMI, the entity can also demonstrate that the shares are managed together on a group basis. The entity also assesses the effectiveness criteria for hedge accounting (see Qualifying criteria Designation). Consequently, the entity designates the SMI futures contracts as the hedging instrument in a hedge of the fair value of the portfolio. As a result, the gains or losses on the SMI futures are accounted for in OCI as well, thus eliminating the accounting mismatch.
Whether the items in the group are managed together on a group basis is a matter of fact, i.e., it depends on an entity’s behavior and cannot be achieved by mere documentation.
Hedging a component of a group
A group designation can also consist of a component of a group of items, such as a layer component of a group. A component could also be a proportion of a group of items, such as 50% of a fixed rate bond series with a total volume of CU100m. Whether an entity designates a layer component or a proportionate component depends on the entity’s risk management objective.
The benefits of identifying a layer component, discussed in Hedging accounting requirements on this site, may be even more relevant when applied to a group of items. The bottom layer hedging strategy discussed in the example in Hedging accounting requirements is, in fact, a designation of a component of a group.
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Groups of items Hedging
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