IFRS 9 hedge accounting applies to all hedge relationships, with the exception of fair value hedges of the interest rate exposure of a portfolio of financial assets or financial liabilities (commonly referred as ‘fair value macro hedges’). This exception arises because IASB has a separate project to address the accounting for macro hedges. In the meantime, until this project is completed, companies using IFRS 9 for hedge accounting can continue to apply IAS 39 requirements for fair value macro hedges.
The reason for addressing such hedges separately is that hedges of open portfolios introduce additional complexity. Risk management strategies tend to have a time horizon over which an exposure is hedged; so, as time passes, new exposures are continuously added to such hedged portfolios, and other exposures are removed from them.
This scope exception is not applicable when hedging closed portfolios. IFRS 9 addresses the accounting for hedges of closed portfolios or groups of items that constitute a gross or net position (refer to ‘Hedging groups of net positions‘ below for further details).
It is expected that the macro hedging project will be most relevant for financial institutions, but it is still possible that IASB may broaden the scope to consider other than fair value macro hedges of interest rate risk (for example, macro hedges of commodity price risk).
Hedging groups of net positions
IFRS 9 provides more flexibility for hedges of groups of items, although, as noted earlier, it does not cover macro hedging. Treasurers commonly group similar risk exposures and hedge only the net position and so IFRS 9 allows the potential to align the accounting approach with the risk management strategy.
For cash flow hedges of a group of items that are expected to affect P&L in different reporting periods, the qualifying criteria are:
- Only hedges of foreign currency risk are allowed.
- The items within the net position must be specified in such a way that the pattern of how they will affect P&L is set out as part of the initial hedge designation and documentation (this should include at least the reporting period, nature and volume).
The ability to hedge net positions under IFRS 9 allows hedge designation in a way that is aligned to an entity’s risk management strategy. But, IFRS 9 requires the presentation of the gains and losses on recycling as a separate line item in profit or loss (separate from the hedged items), and so it does not allow an entity to present the post-hedging results of its commercial activities for those line items. This may mean the ability to hedge net positions is not as widely used as it might otherwise have been.
In addition, net nil positions (that is, where hedged items among themselves fully offset the risk that is managed on a group basis) are now allowed to be designated in a hedging relationship that does not include a hedging instrument, provided that all the following criteria are met:
- The hedge is part of a rolling net risk hedging strategy (that is, the entity routinely hedges new positions of the same type, think of hedge documentation!);
- The hedged net position changes in size over the life, and the entity uses eligible hedging instruments to hedge the net risk;
- Hedge accounting is normally applied to such net positions; and
- Not applying hedge accounting to the net nil position would give rise to inconsistent accounting outcomes.
IASB expects that hedges of net nil positions would be coincidental and therefore rare in practice.
Macro hedging Macro hedging Macro hedging Macro hedging Macro hedging