IFRS 9 Practical Hedge documentation template

This IFRS 9 Practical Hedge documentation template can be used as the basis for the formal documentation required by IFRS 9. However, every hedge is a specific transaction so changes should be made based on the actual situation to document. In section 9 there is room to add smaller additions and/or attachments to complete the hedge documentation at the required level.

1. Risk management objective and strategy

If not clear from the overall risk management strategy, include why the proposed hedging objective is consistent with the entity’s risk management strategy for undertaking hedges. Otherwise this section may make reference to the entity’s risk management department’s central documents.

2. Type of hedging relationship

IFRS 9 Practical Hedge documentation template
Alignment hedge instrument and hedged item and timing impact in profit or loss

Fair value hedge  —–  ☐ Cash flow hedge  —–  ☐ Hedge of net investment in a foreign operation

Date of designation: _____________ IFRS 9 Practical Hedge documentation template

Note: A hedge of the foreign currency risk of an unrecognised firm commitment may be accounted for as a fair value hedge or a cash flow hedge

3. Nature of risk being hedged

Fair value hedge IFRS 9 Practical Hedge documentation template

Interest rate risk – Changes in the benchmark interest rate for recognized fixed-rate financial instruments.

Credit risk includes: — changes in the obligor’s creditworthiness; and — changes in the credit spread over the benchmark interest rate.

Foreign currency risk Financial items – Changes in the related foreign currency exchange rates.

☐ Foreign currency risk Non-financial items – Changes in the related foreign currency exchange rates if the firm commitment is denominated in a foreign currency.

☐ Price risk Financial and Non-financial items -Total change in the fair value.

Cash flow hedge IFRS 9 Practical Hedge documentation template

☐ Interest rate risk – Either:

— ☐  changes in a contractually specified interest rate for variable-rate financial instruments or forecasted issuances or purchases of variable-rate financial instruments; or

— ☐  changes in the benchmark interest rate for forecasted issuances or purchases of fixed-rate financial instruments.

☐ Credit risk includes: — risk of default; — changes in the obligor’s creditworthiness; and — changes in the credit spread over the contractually specified interest rate or the benchmark interest rate. Hedge ac

☐ Foreign currency risk Financial items – Changes in the related foreign currency exchange rates.

☐ Foreign currency risk Non-financial items – Changes in the related foreign currency exchange rates of foreign currency denominated forecasted transactions or firm commitments.

☐ Price risk Financial items – Total change in the cash flows related to the asset or liability – e.g. all changes in the purchase price or sales price.

☐ Price risk Non-financial items -Either:

– ☐  all changes in the purchase price or sales price of the asset – i.e. price risk; or

– ☐  changes in a contractually specified component – i.e. a component of price risk.

Other risk (for example, equity risk, commodity risk, please specify)

☐ ______________ IFRS 9 Practical Hedge documentation template

☐ ______________ IFRS 9 Practical Hedge documentation template

4. Identification of hedged item

☐ Is the hedged item a layer component? If yes specify the defined part of the nominal amount or the population (e.g. first X or last X).
☐ Is the hedged item a risk component? If yes, provide details and explain how the component is separately identifiable and reliably measurable
☐ Is the hedged item a group of items? If yes, provide details and explain how the group consists of individual eligible hedged items which share the same risk, are managed on a group basis for risk management purposes.

Is the hedged item a forecasted transaction?

☐ Yes, please complete section 5 below IFRS 9 Practical Hedge documentation template
☐ No, please continue to section 6 IFRS 9 Practical Hedge documentation template

5. Forecasted transactions

(Only required to be completed if the hedged item is a highly probable forecasted transaction)

Nature of forecasted transaction: IFRS 9 Practical Hedge documentation template

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Expected timescale for forecast transaction to take place IFRS 9 Practical Hedge documentation template

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Rationale for forecast transaction being highly probable to occur IFRS 9 Practical Hedge documentation template

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Is there a replacement strategy under which the hedged item described above will/may be replaced by another transaction with the replacement considered part of the same hedge relationship? If yes, provide details of which transactions will/may replace the above described hedged item and explain why it has similar risk characteristics

☐ No – Ready
☐ Yes – Explain

.

Consider this! IFRS 9 Practical Hedge documentation template

In order to deal with any potential issues from replacement of the hedged item the hedge designation should be clear whether such a replacement is covered or not. For example when hedging future interest cash flows it should be clear whether only the interest cash flows on this specific debt instruments are hedged (specific designation) or whether the interest cash flows on first amount of floating rate debt would be the hedged item (generic designation).

In the case of refinancing the specific designation would lead to release of the hedge reserve as the hedged item no longer exists. If generic designation is used the hedge relationship will remain upon a refinancing if the risk is the same as the previous designated risk.

6. Identification of hedging instrument

Transaction number: _______

In order to assure completeness of hedging documentation a number has to be assigned. In an automated situation this will be the first (starting) point, but that will also result in documenting transactions that were ultimately not assessed to be eligible under hedge accounting.

Designation of forward element of forward contracts:

☐ Included in hedge designation
☐ Excluded from hedge designation and recognised in P&L
☐ Excluded from hedge designation and deferred in OCI
☐ NA

Foreign currency basis spreads:

☐ Included in hedge designation
☐ Excluded from hedge designation and recognised in P&L
☐ Excluded from hedge designation and deferred in OCI
☐ NA

Time value of an option:

☐ Included in hedge designation
☐ Excluded from hedge designation and deferred in OCI
☐ NA

Proportion

☐ Proportion used for hedging – Provide detail (e.g. 50% of nominal amount) __________________________
☐ 100% of notional used for hedging

Rollover strategy (provide details of circumstances where the entity may be able to rollover or replace the hedging instrument as part of the entity’s documented hedging objective)

Consider this!

In order to deal with any potential issues from novation of derivatives or roll-over in new hedging instruments, a company could include reference to potential rollover of the derivative within the hedge documentation.

IFRS 9 6.5.6 notes that a replacement of rollover of a hedging instrument is not an expiration or termination is such replacement or rollover is part of the documented risk management objective.

7. Hedge effectiveness

Economic relationship

An economic relationship between a hedged item and hedging instrument exists when an entity expects that the values of the hedged item and hedging instrument will typically move in opposite directions in response to movements in the same risk (hedged risk).

Description of analysis performed to confirm economic relationship exists

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Credit risk does not dominate

A condition for applying hedge accounting is that the effect of credit risk (of either the hedging instrument or the hedged item) does not dominate the value changes that result from the economic relationship that is the subject of the hedge.

Description of analysis performed to confirm credit risk does not dominate

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Hedge ratio

The designated hedge ratio should be the same as that actually used in to hedge, subject to it not creating ineffectiveness that would be inconsistent with the purpose of hedge accounting

Description of hedge ratio and how it is determined

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8. Expected causes of hedge ineffectiveness

Frequency of assessing the hedge effectiveness and any rebalancing required as a result of ineffectiveness

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9. Other information

Add (attach if necessary) any other information that may be used to assist with understanding the hedging relationship, for example a diagram of the transaction structure.

Addition 1

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Addition 2

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Addition

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Attachments

A _____________

B _____________

C _____________

10. Authorisation cycle

Prepared by: _______  ☐ Draft ☐ Modified ☐ Final

Reviewed by:_______

Action required

☐ Please modify   – ☐ Discussed  – ☐ Not discussed

☐ Forward for approval

☐ Make final

 

Version #: ____

If you want to use the template send me a mail for the file in WORD: henkoonk@faqifrs.com

IFRS 9 Practical Hedge documentation template

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