Q: What is the relationship between a risk component in an eligible hedged component of a non-financial item and the market structure in which the hedging activity takes place?
To be eligible for designation as a hedged item, a risk component must be a separately identifiable component, and the changes in cash flows or fair value of the item attributable to a change in that component must be reliably measurable. (IFRS 9 paragraph B6.3.8).
IFRS 9 requires the qualifying criteria for an eligible risk component to be assessed in the context of the particular market structure to which the risks relate and in which the hedging activity takes place (IFRS 9 paragraph B6.3.9).
Consequential Explanation and Reasoning:
In the case of a non-financial item, for there to be a hedgeable risk component it would generally be necessary for the price of the entire item to be built up from various components using a ‘building block’ approach to demonstrate an appropriate market structure.
For example, it should be clear that informed buyers and sellers of this non-financial item would consider the price of the component proposed to be hedged (such as raw materials) in establishing the price of the overall non-financial item. Consideration of the approach of other market participants is necessary to demonstrate that the market structure supports the designation as a risk component.
The evidence required to support the market structure is a matter of judgment based on facts and circumstances, but should not rely solely on the entity’s own negotiating position or standard costing systems.