The new hedge accounting model aims to provide greater cohesion between an entity’s risk management strategy, their objectives for entering into hedging transactions and relationships, and the final impact of hedging on their financial statements. Improved disclosures are provided with the new model regarding the effect of hedge accounting on an entity’s financial statements and risk management strategy as well as details about derivatives entered into and their impact on an entity’s future cash flows.
Risk management strategy and areas to cover are: a) Whether the hedge accounting documentation sufficiently links each individual hedging relationship and the related risk management objective. b) Whether the hedged item is transaction-related or time period-related. c) Whether the hedge effectiveness criteria are met, and d) When rebalancing versus discontinuation of a hedging relationship is appropriate.
IFRS 9 requires that an entity assess at the inception of the hedging relationship, and on an ongoing basis, whether it expects the hedge to be effective. At a minimum, entities are required to perform this ongoing and forward-looking assessment at the earliest of: a) Each reporting date; or b) When a significant change in circumstances that could affect the hedging relationship’s ability to meet the hedge effectiveness criteria occurs.
More complex hedges and the related IFRS 9 requirements are: Aggregated Exposures as a Hedged Item, Hedging Groups of Items, Hedging a Component of an Item, Accounting for the Time Value, and Designating a Credit Exposure at FVTPL
IFRS 9 Hedge accounting content
|Objective and scope of hedge accounting|
|Qualifying criteria for hedge accounting|
Example: Light Sweet Crude Oil commodity swap
|Accounting for qualifying hedging relationships|
Other changes from IAS 39:
IFRS 9 Hedge accounting content IFRS 9 Hedge accounting content IFRS 9 Hedge accounting content IFRS 9 Hedge accounting content IFRS 9 Hedge accounting content