IFRS 7 Interest rate risk disclosure example

IFRS 7 Interest rate risk disclosure example – Interest rate risk is part of the risk disclosures requirements under IFRS 7 Financial Instruments: Disclosures. Interest rate risk is part of market risk (the other market risks being currency risk and other price risk) and is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. IFRS 7 Interest rate risk disclosure example

Management should disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period [IFRS 7 31]. The disclosures … Read more

Time value of options

Time value of options is about one of the other changes from IAS 39 to IFRS 9 in respect of hedge accounting

Time value of options is one leg of the fair value of an option, the other leg is the intrinsic value. When using an option for hedging activities, only the intrinsic value is used for offsetting the fair value changes attributable to the hedged risk (unless the hedged item is also an option, see ‘Hedged items‘). Unchanged from IAS 39, an entity can either designate an option as a hedging instrument in its entirety, or it can separate the intrinsic value and the time value and designate only the intrinsic value.

Under IAS 39, when designating Read more

Hedging a component of a group

Hedging a component of a group provides clear examples of hedge accounting in practice. A group designation can also consist of hedging a component of a group of items, such as a layer component of a group. A component could also be a proportion of a group of items, such as 50% of a fixed rate bond series with a total volume of CU 100m. Whether an entity designates a layer component or a proportionate component depends on the entity’s risk management objective.

The benefits of identifying a layer component, discussed at ‘Hedge accounting requirements in IFRS 9‘, may be even more relevant when applied to a group of items. A bottom layer hedging strategy is, in fact, Read more

Groups of items Hedging

Groups of items hedging, designation of layer components these are relevant for a practical risk management process to base hedge accounting on. Hedge accounting under IAS 39 was primarily designed from a single instrument viewpoint, and therefore less effective to apply. A hedging relationship would typically include a single hedging instrument (e.g., an interest rate swap) hedging a single item (e.g., a loan). However, for operational reasons entities often economically hedge several items together on a group basis. IAS 39 allows several items to be hedged together as a group, but there are restrictions such that there are relatively few types of groups that are eligible as hedged items.

In an effort to address the issues raised by these restrictions, Read more

Hedge accounting requirements

Hedge accounting requirements – IFRS 9 now allows, for fair value hedges, the designation of layer components from a defined nominal amount or a defined, but open, population. IFRS 9 still Hedge accounting requirements includes some restrictions, in particular that a layer component that includes a prepayment option does not qualify as a hedged item in a fair value hedge if the fair value of the prepayment option is affected by changes in the hedged risk. Hedge accounting requirements

When an entity has an option to prepay a loan, at fair value, the fair value of the option is not affected by changes in the hedged risk. Consequently, an entity would be able to designate a hedge as described in this example: Hedge Read more

Hedges of exposures affecting OCI

Hedges of exposures affecting OCI is showing examples of exposures as hedged items recorded through other comprehensive income (OCI) and hedge accounting of Aggregated exposures.

Hedges of exposures affecting other comprehensive income

Only hedges of exposures that could affect profit or loss qualify for hedge accounting. The sole exception to this rule is when an entity is hedging an investment in equity instruments for which it has elected to present changes in fair value in OCI, as permitted by IFRS 9. Using that election, gains or losses on the equity investments will never be recognised in profit or loss.

For such a hedge, the fair value change of the hedging instrument is recognised in OCI. Ineffectiveness is also recognised in Read more