Presentation Hedges of groups of items

Presentation hedges of groups of items – IFRS 9 provides more flexibility for hedges of groups of items, although it does not cover macro hedging. The ability to hedge net positions of hedges of groups of items under IFRS 9 is a step forward, in that it allows hedge designation in a way that is consistent with an entity’s risk management strategy.

However, IFRS 9 requires the presentation of the gains and losses on recycling as a separate line item in P&L (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. Presentation Hedges of groups of items

Cash flow hedges Presentation Hedges of groups of items

When designating a group of items in a cash flow hedge, the presentation of the related hedging gains or losses in the statement of profit or loss depends on the nature of the group position.

Nature of position

Line items affected in profit or loss

Presentation in the income statement

Gross position

One line item

The amount reclassified from equity to profit or loss has to be presented in the same line item as the underlying hedged transaction.

Multiple line items

The amount reclassified from equity to profit or loss has to be allocated to the line items affected by the hedged items on a systematic and rational basis.

Net position

Multiple line items

The amount reclassified from equity to profit or loss has to be presented in a separate line item.

Note that the designation of a net position cash flow hedge is only permitted when hedging foreign currency risk (see ‘Cash flow hedge of a net position‘). Presentation Hedges of groups of items

The above requirement for net position cash flow hedges might not seem very attractive, as the presentation of the hedged transactions would not reflect the effect of the hedge. However, the Board was concerned that grossing-up the hedging gain or loss would result in non-existing gains or losses being recognised in the statement of profit or loss, which would be in conflict with the IASB’s Conceptual Framework for Financial Reporting.

Fair value hedges

For fair value hedges of groups of items with offsetting risk positions (i.e., hedges of a net position), entities would have to present the hedging gains or losses in a separate line item in the income statement in order to avoid grossing up the hedging gain or loss on a single instrument into multiple line items. Presentation Hedges of groups of items

However, the treatment in the statement of financial position is different, in that the individual items in the group are separately adjusted for the change in fair value due to changes in the hedged risk. Presentation Hedges of groups of items

Example group of items Presentation Hedges of groups of items

Treasurers commonly group similar risk exposures and hedge only the net position. To illustrate what is meant by a net position of a group of items, consider the following example.

A EUR-functional currency entity has a sales department that sells certain items in USD. At the same time, the purchasing department buys certain products in USD. Each department is unaware of the other’s activities, but both want to hedge their forecast USD sales and purchases respectively. Assume that the sales department has USD100 of sales in six months’ time, so it enters into a forward contract with the entity’s central treasury department.

The purchasing department has forecast purchases of USD90, also in six months’ time, and it also enters into an internal derivative with the central treasury department. Each department wants to use its derivative as a hedged item, but it cannot because the derivative is internal, and so it is eliminated on consolidation.

However, in order to hedge the group’s exposure, the treasury department enters into a forward with a bank for USD10. By doing this, the group is economically hedged. However, under IAS 39, it was not possible to designate the net position of USD10 (comprised of USD100 sales and USD90 purchases) as a hedged item.

Instead, the group had to designate USD10 out of the USD100 of future sales as the hedged item. This did not reflect the entity’s risk management strategy and is not how the entity tracked the appropriateness of the economic hedge relationship. It is no surprise that this was a common complaint from preparers about IAS 39.

Under IFRS 9, however, a net position that incorporates offsetting positions can be hedged, where all items included in the group are individually eligible as hedged items and the items in the group are managed together on a group basis for risk management purposes. This means that the group can now apply hedge accounting to a net position comprised of sales of USD100 and purchases of USD90 with a USD10 derivative, which mirrors the entity’s risk management.

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).

See also: The IFRS Foundation

Presentation Hedges of groups of items

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