Excellent Study IFRS 9 Eligible Hedged items

IFRS 9 Eligible Hedged items

the insured items of business risk exposures

Although the popular definition of hedging is an investment taken out to limit the risk of another investment, insurance is an example of a real-world hedge.

Every entity is exposed to business risks from its daily operations. Many of those risks have an impact on the cash flows or the value of assets and liabilities, and therefore, ultimately affect profit or loss. In order to manage these risk exposures, companies often enter into derivative contracts (or, less commonly, other financial instruments) to hedge them. Hedging can, therefore, be seen as a risk management activity in order to change an entity’s risk profile.

The idea of hedge accounting is to reduce (insure) this mismatch by changing either the measurement or (in the case of certain firm commitments) FRS 9 Eligible Hedged itemsrecognition of the hedged exposure, or the accounting for the hedging instrument.

The definition of a Hedged item

A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that

  1. exposes the entity to risk of changes in fair value or future cash flows and
  2. is designated as being hedged

The hedge item can be:

Only assets, liabilities, firm commitments and forecast transactions with an external party qualify for hedge accounting. As an exception, a hedge of the foreign currency risk of an intragroup monetary item qualifies for hedge accounting if that foreign currency risk affects consolidated profit or loss. In addition, the foreign currency risk of a highly probable forecast intragroup transaction would also qualify as a hedged item if that transaction affects consolidated profit or loss. These requirements are unchanged from IAS 39.

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Example accounting policies

Example accounting policies

Get the requirements for properly disclosing the accounting policies to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used standards for financial reporting, the IFRS Standards. First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.Example accounting policies

Example accounting policies guidance

Whether to disclose an accounting policy

1. In deciding whether a particular accounting policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in the reported financial performance and financial position. Disclosure of particular accounting policies is especially useful to users where those policies are selected from alternatives allowed in IFRS. [IAS 1.119]

2. Some IFRSs specifically require disclosure of particular accounting policies, including choices made by management between different policies they allow. For example, IAS 16 Property, Plant and Equipment requires disclosure of the measurement bases used for classes of property, plant and equipment and IFRS 3 Business Combinations requires disclosure of the measurement basis used for non-controlling interest acquired during the period.

3. In this guidance, policies are disclosed that are specific to the entity and relevant for an understanding of individual line items in the financial statements, together with the notes for those line items. Other, more general policies are disclosed in the note 25 in the example below. Where permitted by local requirements, entities could consider moving these non-entity-specific policies into an Appendix.

Change in accounting policy – new and revised accounting standards

4. Where an entity has changed any of its accounting policies, either as a result of a new or revised accounting standard or voluntarily, it must explain the change in its notes. Additional disclosures are required where a policy is changed retrospectively, see note 26 for further information. [IAS 8.28]

5. New or revised accounting standards and interpretations only need to be disclosed if they resulted in a change in accounting policy which had an impact in the current year or could impact on future periods. There is no need to disclose pronouncements that did not have any impact on the entity’s accounting policies and amounts recognised in the financial statements. [IAS 8.28]

6. For the purpose of this edition, it is assumed that RePort Co. PLC did not have to make any changes to its accounting policies, as it is not affected by the interest rate benchmark reforms, and the other amendments summarised in Appendix D are only clarifications that did not require any changes. However, this assumption will not necessarily apply to all entities. Where there has been a change in policy, this will need to be explained, see note 26 for further information.

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Lessee accounting under IFRS 16

Lessee accounting under IFRS 16

The key objective of IFRS 16 is to ensure that lessees recognise assets and liabilities for their major leases.

1. Lessee accounting model

A lessee applies a single lease accounting model under which it recognises all leases on-balance sheet, unless it elects to apply the recognition exemptions (see recognition exemptions for lessees in the link). A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make payments. [IFRS 16.22]

[IFRS 16.47, IFRS 16.49]

IFRS 16 Balance sheet Profit or loss

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IFRS 15 Customers unexercised rights and breakage

IFRS 15 Customers unexercised rights and breakage

INTRO An entity may receive a non-refundable prepayment from a customer that gives the customer the right to receive goods or services in the future. Common examples include gift cards, vouchers and non-refundable tickets. Typically, some customers do not exercise their right – this is referred to as ‘breakage’.

An entity recognises a prepayment received from a customer as a contract liability and recognises revenue when the promised goods or services are transferred in the future. However, a portion of the contract liability recognised may relate to contractual rights that the entity does not expect to be exercised – i.e. a breakage amount. [IFRS 15.B44–B45]

The timing of revenue recognition related to breakage depends on whether the entity expects to be entitled to a breakage amount – i.e. if it is highly probable that recognising breakage will not result in a significant reversal of the cumulative revenue recognised. [IFRS 15.B46]

Customers unexercised rights

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Disclosure Financial risk management

Disclosure Financial risk management

Disclosure financial risk management provides the guidance on the need for disclosure of the management policies, procedures and measurement practices in place at the operations within the reporting entity’s group of companies and an actual example of disclosures for financial risk management.

Disclosure Financial risk management guidance

Classes of financial instruments

Where IFRS 7 requires disclosures by class of financial instrument, the entity shall group its financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. The classes are determined by the entity and are therefore distinct from the categories of financial instruments specified in IFRS 9. Disclosure Financial risk management

As a minimum, the entity should distinguish between financial instruments measured at amortised cost and those measured at fair value, and treat as separate class any financial instruments outside the scope of IFRS 9. The entity shall provide sufficient information to permit reconciliation to the line items presented in the balance sheet. Guidance on classes of financial instruments and the level of required disclosures is provided in Appendix B to IFRS 7. [IFRS 7.6, IFRS 7.B1-B3]

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IFRS 15 Revenue Disclosures Examples

IFRS 15 Revenue Disclosures Examples

IFRS 15 Revenue Disclosures Examples provides the context of disclosure requirements in IFRS 15 Revenue from contracts with customers and a practical example disclosure note in the financial statements. However, as this publication is a reference tool, no disclosures have been removed based on materiality. Instead, illustrative disclosures for as many common scenarios as possible have been included.

Please note that the amounts disclosed in this publication are purely for illustrative purposes and may not be consistent throughout the example disclosure related party transactions.

Users of the financial statements should be given sufficient information to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. To achieve this, entities must provide qualitative and quantitative information about their contracts with customers, significant judgements made in applying IFRS 15 and any assets recognised from the costs to obtain or fulfil a contract with customers. [IFRS 15.110]

Disaggregation of revenue

[IFRS 15.114, IFRS 15.B87-B89]

Entities must disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. It will depend on the specific circumstances of each entity as to how much detail is disclosed. The Reporting entity Plc has determined that a disaggregation of revenue using existing segments and the timing of the transfer of goods or services (at a point in time vs over time) is adequate for its circumstances. However, this is a judgement and will not necessarily be appropriate for other entities.

Other categories that could be used as basis for disaggregation include:IFRS 15 Revenue Disclosures Examples

  1. type of good or service (eg major product lines)
  2. geographical regions
  3. market or type of customer
  4. type of contract (eg fixed price vs time-and-materials contracts)
  5. contract duration (short-term vs long-term contracts), or
  6. sales channels (directly to customers vs wholesale).

When selecting categories for the disaggregation of revenue entities should also consider how their revenue is presented for other purposes, eg in earnings releases, annual reports or investor presentations and what information is regularly reviewed by the chief operating decision makers. [IFRS 15.B88]

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Reform of interest rate benchmarks

Reform of interest rate benchmarks

Certain interest rate benchmarks including LIBOR, EURIBOR and EONIA are being or have recently been reformed.

What are interest rate benchmarks?

Interest rate benchmark are used to determine

  1. the amount of interest payable for a wide range of financial products such as derivatives, bonds, loans, structured products and mortgages, and
  2. the valuation of financial products.

The most common examples of interest rate benchmarks used in financial contracts across the world are the London Interbank Offered Rate (LIBOR) and for the Euro, the Euro Interbank Offered Rate (EURIBOR) and Euro Overnight Index Average (EONIA).

Why are these benchmarks being reformed?

As benchmark rates are fundamental to so many financial contracts, they need to be robust, reliable and fit for purpose. Each of these interest rate benchmarks subject to reform were based on the rates at which banks lend to each other in the interbank market.

Financial regulatory authorities have expressed their concern that because interbank lending transactions have significantly decreased in recent years, the Reform of interest rate benchmarksbenchmark rates may no longer be representative or reliable.

This concern has resulted in recommendations made by the Financial Stability Board towards the global financial industry to reform the major interest rate benchmarks and to develop a set of alternative rates that are more representative of the current financial environment.

IFRS Reporting disclosure amendments

The amendments made to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures provide certain reliefs in relation to interest rate benchmark reform. The reliefs relate to hedge accounting and have the effect that the reforms should not generally cause hedge accounting to terminate. However, any hedge ineffectiveness should continue to be recorded in the income statement. Given the pervasive nature of hedges involving interbank offered rates (IBOR)-based contracts, the reliefs will affect companies in all industries.

Entities relying on the relief must disclose:

  1. the significant interest rate benchmarks to which the entity’s hedging relationships are exposed
  2. the extent of the risk exposure that the entity manages that is directly affected by the interest rate benchmark reform
  3. how the entity is managing the process of transition to alternative benchmark rates
  4. a description of significant assumptions or judgements that the entity made in applying the reliefs, and
  5. the nominal amount of the hedging instruments in those hedging relationships. [IFRS 7.24H]

Information about how the entity is managing the transition process will provide users with an indication of the extent to which management is prepared for the transition. For example, this could include explanations about differences in fallback provisions between the hedged item and the hedging instruments.

The amendments are not clear whether the disclosure of the extent of the risk exposure that the entity manages could be provided on a qualitative rather than quantitative basis. However, numerical disclosures may be more useful for users.

Accounting policies relating to hedge accounting will need to be updated to reflect the reliefs. Fair value disclosures may also be impacted due to transfers between levels in the fair value hierarchy as markets become more / less liquid.

Entities should consider whether further disclosure of the impending replacement of IBOR should be provided in other parts of the annual report, for example in management’s discussion and analysis.

This Example Disclosure Related party transactions shows the disclosures an entity would have to add if it has a loan with an interest rate based on 3-month GPB LIBOR and a cash flow hedge in the form of a floating-to-fixed rate interest rate swap that is referenced to LIBOR. The disclosures assume that the entity has adopted the hedge accounting requirements of IFRS 9.

While primarily illustrating the disclosures required by the amendments made to IFRS 7 and other hedge accounting disclosures affected by IBOR reform, extractsReform of interest rate benchmarks of other disclosures from the main body of the publication have been included, to provide some context for the additional disclosures.

New or revised disclosures are highlighted with shading. This appendix does not illustrate disclosures that may be required if the terms of the loan and the swap have moved to new benchmark rates.

12 Financial risk management (extracts)

12(a) Derivatives (extracts)

(iv) Hedge effectiveness (extracts)

Hedge ineffectiveness for interest rate swaps is assessed using the same principles as for hedges of foreign currency purchases. It may occur due to:

  • the credit value/debit value adjustment on the interest rate swaps which is not matched by the loan
  • differences in critical terms between the interest rate swaps and loans, and
  • the effects of the forthcoming reforms to GBP LIBOR, because these might take effect at a different time and have a different impact on the hedged item (the floating-rate debt) and the hedging instrument (the interest rate swap used to hedge the debt). Further details of these reforms are set out below. [IFRS 7.22B(c), IFRS 7.23D]

Ineffectiveness of CUXX,XXX has been recognised in relation to the interest rate swaps in other gains or losses in profit or loss for 2020 (2019 CUXX,XXX). The significant increase in ineffectiveness in the current year was caused by the expectation that the interest rate swap and the hedged debt will move from GBP LIBOR to SONIA at different dates. [IFRS 7.24C(b)(ii)]

12(b) Market riskReform of interest rate benchmarks

[IFRS 7.33]

(ii) Cash flow and fair value interest rate risk

[IFRS 7.21C]

The group’s main interest rate risk arises from long-term borrowings with variable rates, which expose the group to cash flow interest rate risk. Group policy is to maintain at least 50% of its borrowings at fixed rate, using floating-to-fixed interest rate swaps to achieve this when necessary.

Generally, the group enters into long-term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the group borrowed at fixed rates directly. During 2020 and 2019, the group’s borrowings at variable rate were mainly denominated in Oneland currency units and US dollars. Except for the GBP LIBOR floating rate debt noted below, other variable interest rates were not referenced to interbank offered rates (IBORs) that will be affected by the IBOR reforms. [IFRS7.22A(a),(b), IFRS7.33(a),(b)]

Included in the variable rate borrowings is a 10-year floating-rate debt of CU10,000,000 (2019 CU10,000,000) whose interest rate is based on 3 month GBP LIBOR. To hedge the variability of in cash flows of this loan, the group has entered into a 10-year interest rate swap with key terms (principal amount, payment dates, repricing dates, currency) that match those of the debt on which it pays a fixed rate and receives a variable rate. [IFRS 7.24H(a)]

The group’s borrowings and receivables are carried at amortised cost. The borrowings are periodically contractually repriced (see below) and to that extent are also exposed to the risk of future changes in market interest rates.

The exposure of the group’s borrowings to interest rate changes and the contractual re-pricing dates of the borrowings at the end of the reporting period are as follows: [IFRS 7.22A(c), IFRS 7.34(a), IFRS 7.24H(b)]

Amounts in CU’000

2020

%of total

2019

% of total

Variable rate borrowings – GBP LIBOR

10,000

10%

10,000

12%

Variable rate borrowings – non-IBOR

43,669

46%

40,150

47%

Fixed rate borrowings – repricing or maturity dates:

– Less than one year

4,735

5%

3,895

5%

– 1 – 5 years

26,626

27%

19,550

23%

– Over 5 years

11,465

12%

11,000

13%

Total

97,515

100%

84,595

100%

An analysis by maturities is provided in note 12(d) below. The percentage of total loans shows the proportion of loans that are currently at variable rates in relation to the total amount of borrowings.

Instruments used by the group

Swaps currently in place cover approximately 37% (2019 – 37%) of the variable loan principal outstanding. The fixed interest rates of the swaps range between 7.8% and 8.3% (2019 – 9.0% and 9.6%), and the variable rates of the loans are between 0.5% and 1.0% above the 90 day bank bill rate or LIBOR which, at the end of the reporting period, were 8.2% and x.x% respectively (2019 – 9.4% and x.x%). [IFRS 7.22B(a), IFRS 7.23B]

The swap contracts require settlement of net interest receivable or payable every 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. [IFRS 7.22B(a)]

Effects of hedge accounting on the financial position and performance

The effects of the interest rate swaps on the group’s financial position and performance are as follows:

Amounts in CU’000

2020

2019

Interest rate swaps

Carrying amount (current and non-current asset)

[IFRS 7.24A(a)(b)]

453

809

Notional amount – LIBOR based swaps [IFRS 7.24H(b),(e)]

10,000

10,000

Maturity date [IFRS 7.23B(a)]

2030

2030

Hedge ratio [IFRS 7.22B(c)]

1 : 1

1 : 1

Change in fair value of outstanding hedging instruments since 1 January [IFRS 7.24A(c)]

xx

xx

Change in value of hedged item used to determine hedge effectiveness [IFRS 7.24B(b)(i)]

xx

xx

Weighted average hedged rate for the year [IFRS 7.23B(b)]

x.x%

x.x%

Notional amount – non-LIBOR based swaps [IFRS 7.24H(b),(e)]

10,010

8,440

Maturity date [IFRS 7.23B(a)]

2020

2019

Hedge ratio [IFRS 7.22B(c)]

1 : 1

1 : 1

Change in fair value of outstanding hedging instruments since 1 January [IFRS 7.24A(c)]

-202

1,005

Change in value of hedged item used to determine hedge effectiveness [IFRS 7.24B(b)(i)]

202

1,005

Weighted average hedged rate for the year [IFRS 7.23B(b)]

8.1%

9.

xx) Significant judgements

Interest rate benchmark reform

Following the financial crisis, the reform and replacement of benchmark interest rates such as GBP LIBOR and other interbank offered rates (‘IBORs’) has become a priority for global regulators. There is currently uncertainty around the timing and precise nature of these changes. [IFRS 7.24H(b)]

To transition existing contracts and agreements that reference GBP LIBOR to SONIA, adjustments for term differences and credit differences might need to be applied to SONIA, to enable the two benchmark rates to be economically equivalent on transition.

Group treasury is managing the group’s GBP LIBOR transition plan. The greatest change will be amendments to the contractual terms of the GBP LIBOR-referenced floating-rate debt and the associated swap and the corresponding update of the hedge designation. However, the changed reference rate may also affect other systems, processes, risk and valuation models, as well as having tax and accounting implications. [IFRS 7.24H(c)]

Relief applied

The group has applied the following reliefs that were introduced by the amendments made to IFRS 9 Financial Instruments in September 2019:

  • When considering the ‘highly probable’ requirement, the group has assumed that the GBP LIBOR interest rate on which the group’s hedged debt is based does not change as a result of IBOR reform.
  • In assessing whether the hedge is expected to be highly effective on a forward-looking basis the group has assumed that the GBP LIBOR interest rate on which the cash flows of the hedged debt and the interest rate swap that hedges it are based is not altered by LIBOR reform.
  • The group has not recycled the cash flow hedge reserve relating to the period after the reforms are expected to take effect.
Assumptions made

In calculating the change in fair value attributable to the hedged risk of floating-rate debt, the group has made the following assumptions that reflect its current expectations:

  • The floating-rate debt will move to SONIA during 2022 and the spread will be similar to the spread included in the interest rate swap used as the hedging instrument.
  • No other changes to the terms of the floating-rate debt are anticipated.
  • The group has incorporated the uncertainty over when the floating-rate debt will move to SONIA, the resulting adjustment to the spread, and the other aspects of the reform that have not yet been finalised by adding an additional spread to the discount rate used in the calculation. [IFRS 7.24H(d)]

Reform of interest rate benchmarks

Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks

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Reform of interest rate benchmarks

Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks

IFRS 5 Non-current assets Held for Sale and Discontinued Operations

 

IFRS 5 Non-current assets Held for Sale and Discontinued Operations

at a glance – here it is the ultimate summary:

IFRS 5

Source: https://www.bdo.global/en-gb/services/audit-assurance/ifrs/ifrs-at-a-glance

Definitions
Cash-generating unit – The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Discontinued operation – A component of an entity that either has been disposed of or is classified as held for sale and either:
  • Represents a separate major line of business or geographical area
  • Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations
  • Is a subsidiary acquired exclusively with a view to resale.
SCOPE
  • Applies to all
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IFRS 7 Other price risks Step-by-step

IFRS 7 Other price risks Step-by-step – Other price risks is part of the risk disclosures requirements under IFRS 7 Financial Instruments: Disclosures. Other price risks is part of market risk (the other main market risk categories being currency risk and interest rate 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 prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer or by factors affecting all similar financial instruments traded in the market. IFRS 7 Other price risks Step-by-step

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