High level overview IFRS 9 Hedge accounting

High level overview IFRS 9 Hedge accounting

IFRS 9 Hedge accounting

High level overview IFRS 9 Hedge accounting

High level overview IFRS 9 Hedge accounting

Source: BDO IFRS at a glance

Or in some more detail…..

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
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Variable fee approach

The variable fee approach is applied to insurance contracts with direct participation features that contain certain eligibility criteria at initial recognition

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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Hedging of a highly probable debt issuance

Hedging of a highly probable debt issuance – Q: Does IFRS 9 allow a highly probable forecast foreign currency debt issuance as eligible as a hedged item in a cash flow hedge of interest rate risk if the currency of issuance is not yet known?

Considerations:

At 1 January 200X, entity A, whose functional currency is the Euro, intends to issue a variable interest rate debt in six months’ time in order to finance future activities. Depending on the market conditions existing at 1 July 200X, entity A will decide Hedging of a highly probable debt issuancewhether the debt is issued in Euros or in US dollars. If the debt is issued in US dollars, then at the debt issuance date (1 July 200X) entity A … Read more

Cross-currency swap

Cross-currency swap – In a currency swap operation, also known as a cross-currency swap, the parties involved agree under contract to exchange the following: the principal amount of a loan in one currency and the interest applicable on it during a specified period of time for a corresponding amount and applicable interest in a second currency.

  • Cross-currency swaps are used to lock in exchange rates for set periods of time. Cross-currency swap
  • Interest rates can be fixed, variable, or a mix of both. Cross-currency swap
  • These instruments trade OTC, and can thus be customized by the parties involved. Cross-currency swap
  • While the exchange rate is locked in, there is still opportunity costs/gains as the exchange rate will likely change.
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Light Sweet Crude Oil commodity swap

Light Sweet Crude Oil commodity swap – If you need some background on commodity swaps, read this….. Light Sweet Crude Oil commodity swap

The case

An entity annual purchase 500 barrels of Light Sweet Crude Oil. These purchases are made in a regular pattern over the year. To ensure the price risk the entity enters into a commodity swap-contract with a contract volume of 500 barrels and a duration of one year. The purchase price for 500 barrels Light Sweet Crude Oil is fixed at USD 88.37. Light Sweet Crude Oil commodity swap

Light Sweet Crude Oil commodity swap

Light Sweet Crude Oil commodity swapAt settlement date of the commodity swap-contract, the average exchange spot price of Light Sweet Crude Oil on the Chicago Mercantile Exchange was USD 91.21.

As a … Read more

Hedge of forecast foreign currency purchases

Hedge of forecast foreign currency purchases presents a complete descriptive case of a hedge, from start to finish. Step-by-step build a file to document a hedge and appropriately account for it under IFRS.

This narrative can also be used as a sort of starting point to the hedge documentation required for each hedging relationship at inception

The Case

Type of hedge: Cash flow hedge

Hedged risk: FX risk – spot component only

Key features: Spot rate designated, Basis adjustment required for inventory, Cost of hedging approach elected – Forward points taken to OCI, Inclusion of time value of money in measuring hedge ineffectiveness

Background and assumptions

Company A is a French company with a EUR functional currency. Read more

Own use contracts

Own use contracts is one of the other changes from IAS 39 to IFRS 9 in respect of hedge accounting.

What are own use contracts

Generally, a contract to buy or sell a non-financial item is not within the scope of IFRS 9. However, certain contracts to buy or sell a non-financial item may be required to be accounted for in accordance with IFRS 9 if those contracts can be settled:

  1. net in cash or another financial instrument; or
  2. by exchanging financial instruments, as if the contracts were financial instruments.

IFRS 9 2.6 provides examples of ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by … Read more

Designating proxy hedges – Fine 2 read easy understand

Designating proxy hedges

Designating proxy hedges is a direct result from IASB’s IFRS 9 Hedge accounting ambition to align hedge accounting more to/into the risk management activities of a reporting entity. But not on a scholastic, black/white, way.

The objective of IFRS 9 Hedge accounting is to represent, in the financial statements, the effect of an entity’s risk management activities. HoweDesignating proxy hedgesver, this does not mean that an entity can only designate hedging relationships that exactly mirror its risk management activities.

In fact, in many cases entities will designate so called proxy hedges (i.e., designations that do not exactly represent the actual risk management). During the redeliberations leading to the final standard, the Board decided that proxy hedging is Read more