Presentation Fair value hedges

Presentation Fair value hedges is a short overview on what to deal with in presenting and disclosing fair value hedges in IFRS financial statements.

A fair value hedge is used when an entity is looking to eliminate or reduce the exposure that arises from changes in the fair value of a financial asset or liability (or other eligible exposure) due to changes in a particular risk, such as interest rate risk on a fixed rate debt instrument. The hedged item is permitted to be measured at fair value each period in respect of the hedged risk (not for all risks), even if the hedged item is normally measured at amortized cost. Presentation Fair value hedges

Any resulting adjustment to the carrying amount of the hedged item related to the hedged risk is recognized in profit or loss, even if such a change normally would be recognized in Other Comprehensive Income (OCI) – for example in the case of an instrument classified as available for sale.

Presentation Fair value hedges

IFRS 9 does not change how fair value hedges are presented. With the introduction of IFRS 13 Fair value measurement the IFRS 7 disclosures for fair value (and fair value hedges) were relocated to IFRS 13. In particular the disclosures around the fair value hierarchy. Presentation Fair value hedges

In addition, IFRS 13 includes fair value disclosures and remaining fair value disclosure requirements formerly in IFRS 7 in respect of day 1 gains and losses, and situations in which fair value disclosures are not required. Entities would continue to recognise the gain or loss on the hedging instrument in profit or loss and adjust the carrying amount of the hedged item for the hedging gain or loss with the adjustment being recognised in profit or loss. Presentation Fair value hedges

However, the accounting is different for hedges of equity instruments for which an entity has elected to present fair value changes in other comprehensive income. Presentation Fair value hedges

Illustrative disclosure of the effects of hedge accounting on the financial position and performance

The impact of hedging instruments designated in fair value hedging relationships as of 31 December 20×0 on the statement of financial position of Alpha Beta Coffee Group (the Group) is, as follows:

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Fair value hedges

Notional amount

Carrying amount

Line item reporting in the Statement of Financial Position

Change in fair value used for measuring ineffectiveness for the period

Interest rate risk

Receive fixed/pay variable interest rate swap

EUR 200 Million

-10.0

Long-term derivative financial liabilities

-2.0

Fair value hedges

Carrying amount

Thereof accumulated fair value adjustments

Line item reporting in the Statement of Financial Position

Change in fair value used for measuring ineffectiveness for the period

Interest rate risk

Fixed rate borrowings

211

11

Long-term borrowings

2.1

Fair value hedges

Ineffectiveness recognised in profit or loss

Line item reporting in the Statement of profit or loss

Interest rate risk

Fixed rate borrowings

-0.1

Other financial expenses

IFRS 7 further requires a reconciliation of the components in equity that arise in connection with hedge accounting (such as the hedging reserve) and an analysis of OCI. That information needs to be disaggregated by risk category, which can be done in the notes.

Because the IFRS 13 Fair value disclosures are not only for fair value hedges here is a disclosure requirement listing which is commonly used in annual financial reporting guides.

For an entity that has a fair value hedge, the required disclosures would include:

  • the carrying amount of the hedged item recognised in the statement of financial position (presenting assets separately from liabilities);
  • the accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item recognised in the statement of financial position (presenting assets separately from liabilities);
  • the line item in the statement of financial position that includes the hedged item;
  • the change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period;
  • the accumulated amount of fair value hedge adjustments remaining in the statement of financial position for any hedged items that have ceased to be adjusted for hedging gains and losses;
  • hedge ineffectiveness: i.e. the difference between the hedging gains or losses of the hedging instrument and the hedged item recognised in profit or loss; and
  • the line item in the statement of profit or loss and OCI that includes the recognised hedge ineffectiveness.
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Presentation Fair value hedges

Presentation Fair value hedges

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