Presentation Cash flow hedges

Presentation Cash flow hedges is about the reporting lines in which cash flow hedges are included in the Statement of financial position, Statement of profit or loss and other comprehensive income.

Don’t forget about the hedge documentation and other qualifying criteria. The general mechanics of how ongoing cash flow hedges are presented has not changed compared with IAS 39. Entities would continue to accumulate in the hedging reserve (i.e., in equity, now in the standard called ‘cash flow hedge reserve’) the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item. This is often referred to as the ‘lower-of-test’ and basically assures that, in line with the IASB’s Conceptual Framework, an entity is not recognising an asset or liability that does not exist.

IFRS 9 is stricter than IAS 39 as to how the amount accumulated in the hedging reserve is subsequently accounted for, depending on the nature of the underlying hedged transaction:

  • If the hedged transaction subsequently results in the recognition of a non-financial item, the amount accumulated in equity is removed from the separate component of equity and included in the initial cost or other carrying amount of the hedged asset or liability. This accounting entry, sometimes referred to as ‘basis adjustment’, does not affect other comprehensive income (OCI) of the period.
  • The above accounting treatment would equally apply to situations where the hedged forecast transaction of a non-financial asset or non-financial liability subsequently becomes a firm commitment for which fair value hedge accounting is applied.
  • For any other cash flow hedges, the amount accumulated in equity is reclassified to profit or loss as a reclassification adjustment in the same period or periods during which the hedged cash flows affect profit or loss. This accounting entry does affect OCI of the period.

If cash flow hedge accounting is discontinued, the amount that has been accumulated in OCI shall: Presentation Cash flow hedges

  • Remain in accumulated OCI if the hedged future cash flows are still expected to occur
  • Be immediately reclassified to profit or loss as a reclassification adjustment if the hedged future cash flows are no longer expected to occur

After discontinuation, once the hedged cash flow occurs, any amount remaining in accumulated OCI shall be accounted for depending on the nature of the underlying transaction (as described above).

In contrast, IAS 39 provides an accounting policy choice to entities that hedge a forecast transaction resulting in the recognition of a non-financial item, to account for the amount accumulated in equity either as a basis adjustment or as a reclassification adjustment.

IFRS 9 also mentions ‘periods that interest income or interest expense is recognised’ as an example of a period over which the amount accumulated in the hedging reserve would have to be reclassified to profit or loss. This clarifies that entities cannot simply account for the net payment on an interest rate swap in profit or loss, but would have to present this as a reclassification adjustment between OCI and profit or loss.

In general for every cash flow hedge the following disclosures are presented:

Risk management

Explanation of the risk management strategy for each risk category of risk exposures that it decides to hedge and for which hedge accounting is applied. This explanation should enable users of financial statements to evaluate (for example):

  1. how each risk arises. Presentation Cash flow hedges
  2. how the entity manages each risk; this includes whether the entity hedges an item in its entirety for all risks or hedges a risk component (or components) of an item and why.
  3. the extent of risk exposures that the entity manages. Presentation Cash flow hedges

This implies information should be presented with regard to (among others!):

  1. the hedging instruments that are used (and how they are used) to hedge risk exposures;
  2. how the entity determines the economic relationship between the hedged item and the hedging instrument for the purpose of assessing hedge effectiveness; and
  3. how the entity establishes the hedge ratio and what the sources of hedge ineffectiveness are.

Designation risk components

In respect of any designation of a specific risk component as a hedged item (see IFRS 9 6.3.7) additional disclosures in qualitative or quantitative information are provided about:

  1. how the entity determined the risk component that is designated as the hedged item (including a description of the nature of the relationship between the risk component and the item as a whole); and
  2. how the risk component relates to the item in its entirety (for example, the designated risk component historically covered on average 80 per cent of the changes in fair value of the item as a whole). Presentation Cash flow hedges

[IFRS 7 22A – 22C]

The amount, timing and uncertainty of future cash flows

Quantitative information disclosures

Unless exempted (see below), an entity shall disclose by risk category quantitative information to allow users of its financial statements to evaluate the terms and conditions of hedging instruments and how they affect the amount, timing and uncertainty of future cash flows of the entity.

To meet this requirement, an entity shall provide a breakdown that discloses:

  1. a profile of the timing of the nominal amount of the hedging instrument; and Presentation Cash flow hedges
  2. if applicable, the average price or rate (for example strike or forward prices etc) of the hedging instrument.
Exemption

In situations in which an entity frequently resets (ie discontinues and restarts) hedging relationships because both the hedging instrument and the hedged item frequently change (ie the entity uses a dynamic process in which both the exposure and the hedging instruments used to manage that exposure do not remain the same for long—such as in the example in IFRS 9 B6.5.24(b)) the entity:

  1. is exempt from providing the disclosures required for risk management mentioned above. Presentation Cash flow hedges
  2. shall disclose: Presentation Cash flow hedges
    1. information about what the ultimate risk management strategy is in relation to those hedging relationships;
    2. a description of how it reflects its risk management strategy by using hedge accounting and designating those particular hedging relationships; and
    3. an indication of how frequently the hedging relationships are discontinued and restarted as part of the entity’s process in relation to those hedging relationships.

An entity shall disclose by risk category a description of the sources of hedge ineffectiveness that are expected to affect the hedging relationship during its term.

If other sources of hedge ineffectiveness emerge in a hedging relationship, an entity shall disclose those sources by risk category and explain the resulting hedge ineffectiveness.

For cash flow hedges, an entity shall disclose a description of any forecast transaction for which hedge accounting had been used in the previous period, but which is no longer expected to occur.

[IFRS 7 23A – 23F]

The effects of hedge accounting on financial position and performance

Disclosures in the form of a table of: Presentation Cash flow hedges

  • amounts related to items designated as hedging instruments separately by risk category for cash flow hedges: Presentation Cash flow hedges
    • the carrying amount of the hedging instruments (financial assets separately from financial liabilities);
    • the line item in the statement of financial position that includes the hedging instrument; Presentation Cash flow hedges
    • the change in fair value of the hedging instrument used as the basis for recognising hedge ineffectiveness for the period; and
    • the nominal amounts (including quantities such as tonnes or cubic metres) of the hedging instruments. Presentation Cash flow hedges
  • amounts related to hedged items separately by risk category for cash flow hedges: Presentation Cash flow hedges
    • the change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period (ie for cash flow hedges the change in value used to determine the recognised hedge ineffectiveness in accordance with IFRS 9 6.5.11(c)); Presentation Cash flow hedges
    • the balances in the cash flow hedge reserve for continuing hedges that are accounted for in accordance with IFRS 9 6.5.11 and IFRS 9 6.5.13(a); and
    • the balances remaining in the cash flow hedge reserve and the foreign currency translation reserve from any hedging relationships for which hedge accounting is no longer applied.
  • amounts separately by risk category for cash flow hedges: Presentation Cash flow hedges
    • hedging gains or losses of the reporting period that were recognised in other comprehensive income;
    • hedge ineffectiveness recognised in profit or loss; Presentation Cash flow hedges
    • the line item in the statement of comprehensive income that includes the recognised hedge ineffectiveness;
    • the amount reclassified from the cash flow hedge reserve into profit or loss as a reclassification adjustment (see IAS 1) (differentiating between amounts for which hedge accounting had previously been used, but for which the hedged future cash flows are no longer expected to occur, and amounts that have been transferred because the hedged item has affected profit or loss); Presentation Cash flow hedges
    • the line item in the statement of comprehensive income that includes the reclassification adjustment (see IAS 1); and
    • for hedges of net positions, the hedging gains or losses recognised in a separate line item in the statement of comprehensive income (see IFRS 9 6.6.4).

When the volume of hedging relationships to which the exemption mentioned above applies is unrepresentative of normal volumes during the period (ie the volume at the reporting date does not reflect the volumes during the period) an entity shall disclose that fact and the reason it believes the volumes are unrepresentative.

A reconciliation of each component of equity and an analysis of other comprehensive income in accordance with IAS 1 is provided that, taken together:

  • differentiates, at a minimum, between the amounts that relate to the disclosures of OCI hedging gains or losses (from IFRS 7 24C9b(i)) and the amount reclassified from the cash flow hedge reserve (from IFRS 7 24C9b(iv)) as well as the amounts accounted for in accordance with IFRS 9 6.5.11(d)(i) and IFRS 9 6.5.11(d)(iii);
  • differentiates between the amounts associated with the time value of options that hedge transaction related hedged items and the amounts associated with the time value of options that hedge time-period related hedged items when an entity accounts for the time value of an option in accordance with IFRS 9 6.5.15; and
  • differentiates between the amounts associated with forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge transaction related hedged items, and the amounts associated with forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge time-period related hedged items when an entity accounts for those amounts in accordance with IFRS 9 6.5.16.

An entity shall disclose the reconciliation information required in this last section separately by risk category. This disaggregation by risk may be provided in the notes to the financial statements.

[IFRS 7 24A – 24F]

Presentation Cash flow hedges

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