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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IFRS 7 Other price risks Step-by-step

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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

Management … Read more

IFRS 7 Interest rate risk disclosure example

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IFRS 7 Interest rate risk disclosure example – Interest rate risk is part of the risk disclosures requirements under IFRS 7 Financial Instruments: Disclosures. Interest rate risk is part of market risk (the other market risks being currency risk and other price 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 interest rates. IFRS 7 Interest rate risk disclosure example

Management should disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period [IFRS 7 31Read more

IFRS 9 Practical Hedge documentation template

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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  —–  … Read more

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