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

High level overview IFRS 9 Hedge accounting

High level overview IFRS 9 Hedge accounting

OBJECTIVE

The objective of hedge accounting is to represent, in the financial statements, the effect of an entity’s risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss (or other comprehensive income, in the case of investments in equity instruments for which an entity has elected to present changes in fair value in other comprehensive income).

SCOPE

A hedging relationship qualifies for hedge accounting only if all the following criteria are met:

  1. the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
  2. at the inception of the hedging relationship there is formal designation and documentation of the hedging
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Cash flow hedge

The cash flow hedge is one of three hedges defined in IFRS 9, the others are the fair value hedge and the hedge of a net investment, in use to 'insure' risks

Embedded derivatives Equity kicker

Embedded derivatives Equity kicker – A more specific type of embedded derivative that is often found in practice relates to a type of funding provided by venture capital entities is the equity kicker. It is many times part of a sales of a part of a business of a listed company, financed by the venture capital entity. The intention is to prepare the separated business for an IPO within 3 – 5 years after this separation. Embedded derivatives Equity kicker

Example Mezzanine financing Equity kicker

A venture capitalist provides a subordinated loan, that in addition to interest and repayment of principal, contains terms that entitle the venture capitalist to receive shares of the borrower (separated business) free of charge or … Read more

IFRS 9 Inflation as a risk component

Inflation as a risk component – Under IAS 39, inflation cannot be designated as a hedged risk component for financial instruments, unless the inflation risk component is contractually specified. For non-financial instruments, inflation risk cannot be designated under IAS 39 as a risk component at all. Inflation as a risk component

Highlight – For financial instruments, IFRS 9 opens the door for designating a non-contractually specified inflation component as a hedged risk component – but only in limited circumstances. For non-financial instruments, the inflation component will be eligible for designation as the hedged item in a hedging relationship provided that it is separately identifiable and reliably measurable. Inflation as a risk component

For financial instruments, IFRS 9 introduces a rebuttable Read more

IFRS 9 Own use scope exemption

IFRS 9 Own use scope exemption

A reduction in the amount of funding available from equity markets, together with difficulty in obtaining loan finance, have meant that a number of developers and producers in the extractives industry have looked to other ways of obtaining finance. An increasingly common approach is to enter into a commodity loan under which a lender advances funds which,instead of being repaid in cash, may be repaid by the delivery of a quantity of a commodity during a specific period. These arrangements have become particularly common when they involve a commodity such as gold, which is traded on an active market. IFRS 9 Own use scope exemption

Key considerations in the application of the IFRS 9

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Hedged item Risk components Market structure

Hedged item Risk components Market structure – Q: What is the relationship between a risk component in an eligible hedged component of a non-financial item and the market structure in which the hedging activity takes place? Hedged item Risk components Market structure

Considerations: Hedged item Risk components Market structure
To be eligible for designation as a hedged item, a risk component must be a separately identifiable component, and the changes in cash flows or fair value of the item attributable to a change in that component must be reliably measurable. (IFRS 9 paragraph B6.3.8). Hedged item Risk components Market structure

IFRS 9 requires the qualifying criteria for an eligible risk component to be assessed in the context of Read more

Hedged item Risk components Separately identified

Hedged item Risk components Separately identified – Q: What is the necessary evidence to document that changes in cash flows or fair value attributable to changes in a hedged component are separately identifiable? Does a risk component that is an input in the manufacturing process of a non-financial item suffice?

Considerations: Hedged item Risk components Separately identified

To be eligible for designation as a hedged item, a risk component must be a separately identifiable component, and the changes in cash flows or fair value of the item attributable to change in that component must be reliably measurable (IFRS 9 paragraph B6.3.8). Hedged item Risk components Separately identified

An entity wishes to hedge a non-contractually specified risk component of … Read more

Hedged item Risk components Reliable measurement

Hedged item Risk components Reliable measurement – Q: What evidences that changes in cash flows or fair value attributable to changes in a hedged component are reliably measurable?

Considerations: Hedged item Risk components Reliable measurement

To be eligible for designation as a hedged item, a risk component must be a separately identifiable component, and the changes in cash flows or fair value of the item attributable to change in that component must be reliably measurable (IFRS 9 paragraph B6.3.8). Hedged item Risk components Reliable measurement

Company A wishes to designate a risk component as a hedged item. How should company A assess if the ‘reliably measurable’ criterion is met?

Consequential Explanation and Reasoning: Hedged item Risk components Reliable Read more