11 Best fair value measurements under IFRS 13

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 non-listed entities, as … 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

Hedge accounting

Hedge accounting If investors purchase a high level of risk security, they may want to reduce risk with an opposing item purchase referred to as a hedge

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 Practical Hedge documentation template

This IFRS 9 Practical Hedge documentation template can be used as the basis for the formal documentation required by IFRS 9. However, every hedge is a specific transaction so changes should be made based on the actual situation to document. In section 9 there is room to add smaller additions and/or attachments to complete the hedge documentation at the required level.

1. Risk management objective and strategy

If not clear from the overall risk management strategy, include why the proposed hedging objective is consistent with the entity’s risk management strategy for undertaking hedges. Otherwise this section may make reference to the entity’s risk management department’s central documents.

2. Type of hedging relationship

☐ Fair value hedge  —–  ☐ Cash flow … Read more

Hedge accounting of hedges for commodity risks

Hedge accounting of hedges for commodity risks – Under the old rules of IAS 39, hedge accounting could be difficult to achieve in relation to commodity exposures. This was largely due to the fact that IAS 39 did not permit hedging of specific risk components of non-financial items (with the exception of FX risk). Hedge accounting of hedges for commodity risks

For example, a company with a known diesel purchase requirement over the next two to three years may wish to hedge its exposure using a diesel swap. Even though the swap is designed to be a valid economic hedge of the wholesale diesel price risk, the company would not be able to define the hedged risk specifically as such. … Read more

Foreign currency basis spreads

Foreign currency basis spreads is about one of the other changes from IAS 39 to IFRS 9 in respect of hedge accounting

What is the cross currency basis spread

In general, the cross currency basis is a measure of dollar shortage in the market. The more negative the basis becomes, the more severe the shortage. For dollar-funded investors, negative basis can work in their favour when they hedge currency exposures. In order to hedge foreign currency exposure, the dollar-funded investors lend out dollar today and receive it back in the future, earning additional cross currency basis spread on top of the yield of their foreign investments. Foreign currency basis spreads

In fact, for years the Reserve Bank of Australia has Read more

Hedge of a net position

Q: When can an entity make use of a hedge of a net position?

Considerations: Hedge of a net position
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 USD 100,000 of sales in six months’ time, so it enters into a forward contract with the entity’s central treasury department (that is a separate entity within the same group). Hedge of a net position

The purchasing department has highly probable forecast purchases of USD 90,000, also … Read more