High level overview IFRS 9 Hedge accounting
IFRS 9 Hedge accounting
| Criteria to apply hedge accounting (all criteria must be met) | ||
| (i) Hedging Relationship Must consist of:
| (ii) Designation and Documentation Must be formalised at the inception of the hedging relationship, includes:
| (ii) Designation and Documentation Must be formalised at the inception of the hedging relationship, includes:
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| Eligible hedging instruments | ||
| Only those from contracts with EXTERNAL parties of the entity (or group), that are: | ||
| Derivatives measured at fair value through profit or loss (FVTPL). Note: this excludes written options unless they are designated as an offset to a purchased option. | Non-derivatives measured at fair value through profit or loss (FVTPL). Note: this excludes FVTPL financial liabilities where FV changes from own credit risk are recognised in OCI. Note: In hedge of foreign currency risk, other financial instruments maybe designated. | |
| Designation: An entity must designate a hedging instrument in full, except for:
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| Hedging of group entity transactions Hedging of group entity transactions is not applied in the consolidated financial statements of group entities, except for:
Hedging of group entity transactions is able to be applied in separate/individual financial statements of group entities. | Rebalancing | |
| If the hedge ratio hedge effectiveness test ceases to be met, but the risk management objective is unchanged, an entity adjusts (‘rebalances’), the hedge ratio so the criteria is once again met. | ||
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| Discontinuation | |
| Hedge accounting is discontinued only if the qualifying criteria are no longer met (after applying ‘rebalancing’). This including hedging instrument sale / termination / expiration, but excluding:
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| Eligible hedged items | |
| Eligible hedged items are reliably measurable: assets; liabilities; unrecognised firm commitment; highly probable forecast transactions; net investment in a foreign operation. May be a single item, or a group of items (subject to additional criteria – below). | |
| Hedges of a group of items (all criteria must be met) | |
| (iii) For group cash flow hedges: where cash flow variability is not expected to be approximately proportional to the overall group cash flows variability, both:
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| Designation: An entity can designate a hedged item (i) in full (ii) in part (component). If in part, only the following types of parts (components) of hedged items can be hedged:
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| Eligible hedged items | |
| (i) Cash flow hedge Hedge of exposure to cash flow variability in cash attributable to a particular risk associated with an asset, liability, or highly probable forecast transaction (or part thereof i.e. component).
| (ii) Fair value hedge Hedge of exposure to fair value variability in an asset, liability, or unrecognised firm commitment (or part thereof i.e. component), attributable to a risk that could affect profit or loss.
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| (iii) Hedges of a net investment in a foreign operation Hedge of an entity’s interest in the net assets of a foreign operation.
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Or in some more detail…..
| OBJECTIVE The objective of hedge accounting is to represent, in the financial statements, the effect of an entity’s risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss (or other comprehensive income, in the case of investments in equity instruments for which an entity has elected to present changes in fair value in other comprehensive income). SCOPE A hedging relationship qualifies for hedge accounting only if all the following criteria are met:
Specific concepts: – IFRS 9 introduced the the concept of ‘rebalancing‘ to simplify using hedge accounting for imbalancing. – IFRS 9 continues to use the concept of ‘macro hedging‘ from IAS 39. DEFINITIONS A derivative is a financial instrument or other contract with all three of the following features:
Hedging involves designating one or more hedging instruments such that the change in fair value or cash flows of the hedging instrument is an offset, in whole or part, to the change in fair value or cash flows of the hedged item. The objective is to ensure that the gain or loss on the hedging instrument is recognised in profit or loss in the same period that the hedged item affects profit or loss. Hedging instrument for hedge accounting purposes, is a designated derivative or (for a hedge of the risk of changes in foreign currency exchange rates only) a designated non-derivative financial asset or non-derivative financial liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item. |
| QUALIFYING INSTRUMENTS & HEDGE ITEMS A derivative measured at fair value through profit or loss may be designated as a hedging instrument, except for some written options. A non-derivative financial asset or a non-derivative financial liability measured at fair value through profit or loss may be designated as a hedging instrument unless it is a financial liability designated as at fair value through profit or loss for which the amount of its change in fair value that is attributable to changes in the credit risk of that liability is presented in other comprehensive income. High level overview IFRS 9 Hedge accounting For a hedge of foreign currency risk, the foreign currency risk component of a non-derivative financial asset or a non-derivative financial liability may be designated as a hedging instrument provided that it is not an investment in an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income. For hedge accounting purposes, only contracts with a party external to the reporting entity (i.e. external to the group or individual entity that is being reported on) can be designated as hedging instruments. High level overview IFRS 9 Hedge accounting A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a forecast transaction or a net investment in a foreign operation. The hedged item can be:
A hedged item can also be a component of such an item or group of items. The hedged item must be reliably measurable. High level overview IFRS 9 Hedge accounting See also Hedge of a net position. High level overview IFRS 9 Hedge accounting |
| ACCOUNTING FOR QUALIFYING HEDGING RELATIONSHIPS The three types of hedges Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss (see example fair value hedge or an extended explanation in Clear IFRS 9 Fair value hedge accounting). If, during its contract duration, a fair value hedge meets the qualifying criteria, the hedging relationship shall be accounted for as follows:
Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss (see example cash flow hedge). If, during its contract duration, a cash flow hedge meets the qualifying criteria, the hedging relationship shall be accounted for as follows:
Hedge of a net investment in a foreign operation as defined in IAS 21 The effects of changes in Foreign Exchange Rates. Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment shall be accounted for similarly to cash flow hedges:
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| EXAMPLE DISCLOSURES |
| Financial risk management High level overview IFRS 9 Hedge accounting The Company’s board of directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The board of directors has established the risk management committee, which is responsible for developing and monitoring the Group’s risk management policies. The committee reports regularly to the board of directors on its activities. (IFRS 7 31, IFRS 7 33(b)) High level overview IFRS 9 Hedge accounting The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group audit committee oversees how management monitors compliance with the Group’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group audit committee is assisted in its oversight role by internal audit. Internal audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the audit committee. High level overview IFRS 9 Hedge accounting i) Liquidity risk High level overview IFRS 9 Hedge accounting – Exposure to liquidity risk High level overview IFRS 9 Hedge accounting Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. (IFRS 7 31, IFRS 7 33) The Group uses activity-based costing to cost its products and services, which assists it in monitoring cash flow requirements and optimising its cash return on investments. The Group aims to maintain the level of its cash and cash equivalents and other highly marketable debt investments at an amount in excess of expected cash outflows on financial liabilities (other than trade payables) over the next 60 days. The ratio of investments to outflows was 1.65 at 31 December 2019 (2018: 1.58). The Group also monitors the level of expected cash inflows on trade and other receivables together with expected cash outflows on trade and other payables. At 31 December 2019, the expected cash flows from trade and other receivables maturing within two months were €12,331 thousand (2018: €8,940 thousand). This excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. (IFRS 7 34(a), IFRS 7 39(c), IFRS 7 B10A) High level overview IFRS 9 Hedge accounting In addition, the Group maintains the following lines of credit. High level overview IFRS 9 Hedge accounting
The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include contractual interest payments and exclude the impact of netting agreements (see below in italics). High level overview IFRS 9 Hedge accounting The Group has disclosed a contractual maturity analysis for its financial liabilities, which is the minimum disclosure under IFRS 7 in respect of liquidity risk. Because IFRS 7 does not mandate the number of time bands to be used in the analysis, the Group has applied judgement to determine an appropriate number of time bands. (IFRS 7 39, IFRS 7 B11) The Group has included both the interest and principal cash flows in the analysis. Common opinion is that this best represents the liquidity risk being faced by the Group. High level overview IFRS 9 Hedge accounting [IFRS 7 39(a)-(b), IFRS 7 B11A–B11D, IFRS 16 58] High level overview IFRS 9 Hedge accounting
Note C – Commonly, the maturity analysis should include all derivative financial liabilities, but contractual maturities only are required for those essential for an understanding of the timing of the cash flows. The comparatives from 2018 are as follows: [IFRS 7 39(a)-(b), IFRS 7 B11A–B11D, IFRS 16 58] High level overview IFRS 9 Hedge accounting
The inflows/(outflows) disclosed in the above table represent the contractual undiscounted cash flows relating to derivative financial liabilities held for risk management purposes and which are not usually closed out before contractual maturity. The disclosure shows net cash flow amounts for derivatives that are net cash-settled and gross cash inflow and outflow amounts for derivatives that have simultaneous gross cash settlement. (IFS 7 39(b)-(c), IFRS 17 B11D) High level overview IFRS 9 Hedge accounting As disclosed in Notes 28 and 37, the Group has a secured bank loan that contains a loan covenant. A future breach of covenant may require the Group to repay the loan earlier than indicated in the above table. In addition, convertible notes will become repayable on demand if the Group’s net debt to adjusted equity ratio exceeds 1.95. Under the agreement, the covenant is monitored on a regular basis by the treasury department and regularly reported to management to ensure compliance with the agreement. High level overview IFRS 9 Hedge accounting The interest payments on variable interest rate loans and bond issues in the table above reflect market forward interest rates at the reporting date and these amounts may change as market interest rates change. The future cash flows on contingent consideration (see Note 34(A)) and derivative instruments may be different from the amount in the above table as interest rates and exchange rates or the relevant conditions underlying the contingency change. Except for these financial liabilities, it is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts. (IFRS 7 B10A) High level overview IFRS 9 Hedge accounting Note – When the amount payable is not fixed, the amount to be disclosed is determined with reference to conditions existing at the reporting date. For example, for a floating-rate bond with interest payments indexed to three-month Euribor, the amount to be disclosed should be based on forward rates rather than spot rates prevailing at the reporting date because the spot interest rates do not represent the level of the index based on which the cash flows will be payable. The forward interest rates better describe the level of the index in accordance with the conditions existing at the reporting date. High level overview IFRS 9 Hedge accounting ii) Market risk High level overview IFRS 9 Hedge accounting Market risk is the risk that changes in market prices – e.g. foreign exchange rates, interest rates and equity prices – will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. (IFRS 7 33) The Group uses derivatives to manage market risks. All such transactions are carried out within the guidelines set by the risk management committee. Generally, the Group seeks to apply hedge accounting to manage volatility in profit or loss. High level overview IFRS 9 Hedge accounting A fundamental review and reform of major interest rate benchmarks is being undertaken globally. There is uncertainty as to the timing and the methods of transition for replacing existing benchmark interbank offered rates (IBORs) with alternative rates. High level overview IFRS 9 Hedge accounting As a result of these uncertainties, significant accounting judgement is involved in determining whether certain hedge accounting relationships that hedge the variability of foreign exchange and interest rate risk due to expected changes in IBORs continue to qualify for hedge accounting as at 31 December 2019. IBOR continues to be used as a reference rate in financial markets and is used in the valuation of instruments with maturities that exceed the expected end date for IBOR. Therefore, the Group believes the current market structure supports the continuation of hedge accounting as at 31 December 2019. High level overview IFRS 9 Hedge accounting iii) Currency risk (see 1) High level overview IFRS 9 Hedge accounting 1. The Group did not designate any net positions in a hedging relationship. For an entity that did, the required disclosures would include the hedging gains or losses recognised in a separate line item in the statement of profit or loss and OCI. (IFRS 7 24C(b)(vi)) High level overview IFRS 9 Hedge accounting The Group is exposed to transactional foreign currency risk to the extent that there is a mismatch between the currencies in which sales, purchases, receivables and borrowings are denominated and the respective functional currencies of Group companies. The functional currencies of Group companies are primarily the euro and Swiss francs (CHF). The currencies in which these transactions are primarily denominated are euro, US dollars, sterling and Swiss francs. (IFRS 7 21C, IFRS 7 22A(a)) High level overview IFRS 9 Hedge accounting The Group’s risk management policy is to hedge 75 to 85% of its estimated foreign currency exposure in respect of forecast sales and purchases over the following 12 months at any point in time. The Group uses forward exchange contracts to hedge its currency risk, most with a maturity of less than one year from the reporting date. These contracts are generally designated as cash flow hedges (see 2). (IFRS 7 21A, IFRS 7 22A(b)–(c), IFRS 7 22C)) High level overview IFRS 9 Hedge accounting 2. The Group has not designated any fair value hedging relationships. For an entity that has a fair value hedge, the required disclosures would include:
The Group designates the spot element of forward foreign exchange contracts to hedge its currency risk and applies a hedge ratio of 1:1. The forward elements of forward exchange contracts are excluded from the designation of the hedging instrument and are separately accounted for as a cost of hedging, which is recognised in equity in a cost of hedging reserve. The Group’s policy is for the critical terms of the forward exchange contracts to align with the hedged item. (IFRS 7 22B) High level overview IFRS 9 Hedge accounting The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the currency, amount and timing of their respective cash flows. The Group assesses whether the derivative designated in each hedging relationship is expected to be and has been effective in offsetting changes in cash flows of the hedged item using the hypothetical derivative method. (IFRS 7 22B(b)) High level overview IFRS 9 Hedge accounting In these hedge relationships, the main sources of ineffectiveness are (see 3): High level overview IFRS 9 Hedge accounting
3. The Group did not have any new sources of hedge ineffectiveness emerging in designated hedging relationships. If it had, then it would be required to disclose those sources by risk category and explain the resulting hedge ineffectiveness. High level overview IFRS 9 Hedge accounting |
| Exposure to currency risk High level overview IFRS 9 Hedge accounting The summary quantitative data about the Group’s exposure to currency risk as reported to the management of the Group is as follows. (IFRS 7 34(a))
Note a) Although it is not specifically required by the Standards, the Group has disclosed the significant exchange rates applied. This disclosure is provided for illustrative purposes only. In addition, IFRS 7 requires information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date. Sensitivity analysis High level overview IFRS 9 Hedge accounting A reasonably possible strengthening (weakening) of the euro, GBP, or US dollar against all other currencies at 31 December would have affected the measurement of insurance and reinsurance contracts and financial instruments denominated in a foreign currency and affected the CSM, profit or loss and equity by the amounts shown below. This analysis assumes that all other variables remain constant. (IFRS 7 40) High level overview IFRS 9 Hedge accounting
Interest rate risk High level overview IFRS 9 Hedge accounting The Group adopts a policy of ensuring that between 80 and 90% of its interest rate risk exposure is at a fixed rate. This is achieved partly by entering into fixed-rate instruments and partly by borrowing at a floating rate and using interest rate swaps as hedges of the variability in cash flows attributable to movements in interest rates. The Group applies a hedge ratio of 1:1. (IFRS 7 21C, IFRS 7 22A(b)-(c), IFRS 7 22B-22C) High level overview IFRS 9 Hedge accounting The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the reference interest rates, tenors, repricing dates and maturities and the notional or par amounts. High level overview IFRS 9 Hedge accounting The Group assesses whether the derivative designated in each hedging relationship is expected to be effective in offsetting changes in cash flows of the hedged item using the hypothetical derivative method. (IFRS 7 22B(b)) High level overview IFRS 9 Hedge accounting In these hedge relationships, the main sources of ineffectiveness are (see 4): High level overview IFRS 9 Hedge accounting
4. The Group did not have any new sources of hedge ineffectiveness emerging in designated hedging relationships. If it had, then it would be required to disclose those sources by risk category and explain the resulting hedge ineffectiveness. (IFRS 7 23E) High level overview IFRS 9 Hedge accounting Exposure to interest rate risk High level overview IFRS 9 Hedge accounting The interest rate profile of the Group’s interest-bearing financial instruments as reported to the management of the Group is as follows.
Fair value sensitivity analysis for fixed-rate instruments High level overview IFRS 9 Hedge accounting The Group does not account for any fixed-rate financial assets or financial liabilities, at FVTPL, and the Group does not designate derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore, a change in interest rates at the reporting date would not affect profit or loss. A change of 100 basis points in interest rates would have increased or decreased equity by €65 thousand after tax (2018: €66 thousand). This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant. High level overview IFRS 9 Hedge accounting A reasonably possible change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant. High level overview IFRS 9 Hedge accounting
Other market risk High level overview IFRS 9 Hedge accounting The primary goal of the Group’s investment in equity securities is to hold the investments for the long term for strategic purposes. Management is assisted by external advisers in this regard. Certain investments are designated as at FVTPL because their performance is actively monitored and they are managed on a fair value basis. (IFRS 7 B5(a)(iii)) Sensitivity analysis – Equity price risk High level overview IFRS 9 Hedge accounting All of the Group’s listed equity investments are listed on either the London Stock Exchange or the New York Stock Exchange. For such investments classified at FVOCI, a 2% increase in the FTSE 100 plus a 3% increase in the Dow Jones Industrial Average at the reporting date would have increased equity by €28 thousand after tax (2018: an increase of €18 thousand after tax); an equal change in the opposite direction would have decreased equity by €28 thousand after tax (2018: a decrease of €18 thousand after tax). For such investments classified as at FVTPL, the impact of a 2% increase in the FTSE 100 plus a 3% increase in the Dow Jones Industrial Average at the reporting date on profit or loss would have been an increase of €16 thousand after tax (2018: €18 thousand after tax). An equal change in the opposite direction would have decreased profit or loss by €16 thousand after tax (2018: €18 thousand after tax). (IFRS 7 40) Cash flow hedges (see 1,2) High level overview IFRS 9 Hedge accounting 1. The Group does not frequently reset hedging relationships because both the hedging instrument and the hedged item frequently change (i.e. the entity does not use a dynamic process in which neither the exposure nor the hedging instruments used to manage that exposure remain the same for a long period). If it did, then it would be exempt from providing the disclosures required by paragraphs 23A and 23B of IFRS 7, but would instead provide information about the ultimate risk management strategy, how it reflects its risk management strategy in its hedge accounting and designations, and how frequently hedging relationships are discontinued and restarted. If the volume of these hedges is unrepresentative of normal volumes during the year (i.e. the volume at the reporting date does not reflect the volumes during the year), then the entity would disclose that fact and the reason it believes the volumes are unrepresentative. (IFRS 7 23C, IFRS 7 24D) 2. The Group did not have any forecast transaction for which cash flow hedge accounting had been used in the previous period, but which is no longer expected to occur. If it did, then it would be required to disclose a description of the forecast transaction as well as the amount reclassified from the cash flow hedge reserve to profit or loss. (IFRS 7 23F) At 31 December 2019, the Group held the following instruments to hedge exposures to changes in foreign currency and interest rates. (IFRS 7 23B)
At 31 December 2018, the Group held the following instruments to hedge exposures to changes in foreign currency rates.
The amounts at the reporting date relating to items designated as hedged items were as follows. (IFRS 7 24B(b))
The amounts relating to items designated as hedging instruments and hedge ineffectiveness for 2019 were as follows. (IFRS 7 21B, IFRS 7 21D, IFRS 7 24D, IFRS 7 24C(b))
The comparative amounts relating to items designated as hedging instruments and hedge ineffectiveness for 2018 were as follows. (IFRS 7 21B, IFRS 7 21D, IFRS 7 24D, IFRS 7 24C(b))
The following table provides a reconciliation by risk category of components of equity and analysis of OCI items, net of tax, resulting from cash flow hedge accounting. (IFRS 7 24E-24F)
Net investment hedges A foreign currency exposure arises from the Group’s net investment in its Swiss subsidiary that has a Swiss franc functional currency. The risk arises from the fluctuation in spot exchange rates between the Swiss franc and the euro, which causes the amount of the net investment to vary. (IFRS 7 22A) The hedged risk in the net investment hedge is the risk of a weakening Swiss franc against the euro that will result in a reduction in the carrying amount of the Group’s net investment in the Swiss subsidiary. Part of the Group’s net investment in its Swiss subsidiary is hedged by a Swiss franc-denominated secured bank loan (carrying amount: €1,240 thousand (2018: €1,257 thousand)), which mitigates the foreign currency risk arising from the subsidiary’s net assets. The loan is designated as a hedging instrument for the changes in the value of the net investment that is attributable to changes in the EUR/CHF spot rate. (IFRS 7 22B(a)) To assess hedge effectiveness, the Group determines the economic relationship between the hedging instrument and the hedged item by comparing changes in the carrying amount of the debt that is attributable to a change in the spot rate with changes in the investment in the foreign operation due to movements in the spot rate (the offset method). The Group’s policy is to hedge the net investment only to the extent of the debt principal. (IFRS 7 22B(b)) The amounts related to items designated as hedging instruments were as follows. (IFRS 7 24A, IFRS 7 24B(b), IFRS 7 24C(b)(i)-(iii))
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High level overview IFRS 9 Hedge accounting
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