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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Related IFRS posts

Net investment hedge

The net investment hedge is one of three hedges defined in IFRS 9, the others are the fair value hedge and the cash flow hedge, in use for FX operations inv.

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

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

Currency risk

Currency risk - The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

Highly probable

IFRS Definition Highly probable: Significantly more likely than probable. IFRS Definition Probable: More likely than not. And other probability qualifications

Monetary items

Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency cash.

Example of hyperinflation accounting

Example of hyperinflation accounting – Here is an example of hyperinflation accounting (change from functional currency (ARS) to presentation currency (USD)) and a limited disclosure on hedge accounting for a net investment in a foreign operation (Third-party financing of EUR operations in EUR-denominated notes).

  • Hyperinflation accounting

(Source: www.ft.com, ‘American companies count cost of Argentina inflation’ by Alistair Gray in New York and Benedict Mander in Buenos Aires APRIL 7, 2019)

‘Rampant inflation in Argentina has forced US companies to stop using the peso to account for their business in the country, triggering multimillion-dollar foreign exchange losses. Example of hyperinflation accounting

US accounting rules are requiring American businesses to use the dollar as their “functional currency” in Argentina because cumulative

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