Clear IFRS 9 Fair value hedge accounting

Clear IFRS 9 Fair value hedge accounting – The fair value hedge is one of three hedges defined in IFRS 9, the others are the cash flow hedge and the hedge of a net investment.

Hedge accounting can bring a number of advantages over traditional accounting methods. The core benefit is that by addressing the timings mismatch associated with standard derivative accounting, hedge accounting removes temporary volatility from the P&L. As a result, the financial statements will better reflect the company’s true economic performance.

Reducing the volatility in earnings results in a number of additional benefits:

  • Enterprise value. Earnings volatility is negatively perceived by investors.
  • Creditworthiness. Predictability in future earnings is a positive factor in creditworthiness.
  • Risk
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11 Best fair value measurements under IFRS 13

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11 Best fair value measurements under IFRS 13 – Several IFRS standards provide guidance regarding the scope and application of the fair value option for assets and liabilities. Here they are from 1 to 11…….

1 Investments in associates and joint ventures

Investments held by venture capital organizations and the like are exempt from IAS 28’s requirements only when they are measured at fair value through profit or loss in accordance with IFRS 9. Changes in the fair value of such investments are recognized in profit or loss in the period of change.

The IASB acknowledged that fair value information is often readily available in venture capital organizations and entities in similar industries, even for start-up and … Read more

Basis adjustment

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[IFRS 9 Fair value hedge] The adjustment to the amortized cost basis of the hedged item from applying fair value hedge accounting is referred to as a basis adjustment. Basis adjustments are accounted for in the same manner as other components of the amortized cost basis of the hedged item. 

Explanations: Basis adjustment in hedging

A fair value hedge is a hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, that are attributable to a particular risk.

In general, the fair value hedge accounting model has two main elements: Basis adjustment in hedging

Hedging instrument

Hedged item

A derivative hedging instrument is recognized at

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Macro hedging

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Macro hedging – IFRS 9 hedge accounting applies to all hedge relationships, with the exception of fair value hedges of the interest rate exposure of a portfolio of financial assets or financial liabilities (commonly referred as ‘fair value macro hedges’). This exception arises because IASB has a separate project to address the accounting for macro hedges. In the meantime, until this project is completed, companies using IFRS 9 for hedge accounting can continue to apply IAS 39 requirements for fair value macro hedges.

The reason for addressing such hedges separately is that hedges of open portfolios introduce additional complexity. Risk management strategies tend to have a time horizon over which an exposure is hedged; so, as time … Read more