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IFRS 9

Financial Instruments
Part IV: Hedging

IFRS Foundation

Disclaimer and allowed use

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Components of the hedge accounting


model

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Objective
Presentation and
Disclosure

Groups and net


positions

Hedging instruments

Hedge accounting
(IFRS 9, Chapter 6)

Discontinuation
and rebalancing

Hedged items

Qualifying criteria
Accounting for
qualifying hedging
relationships
IFRS Foundation

Objective of hedge accounting

Risk management
objective:

Accounting
objective

Seeks to link risk


management and
financial reporting

Represents in the
financial
statements the
effect of risk
management

Hedging instruments

Instruments that may be


designated as a hedging
instrument

A qualifying instrument must


be designated in its entirety
as a hedging instrument.
The only exceptions
permitted are:

Derivatives at FVTPL except some


written options unless designated
as an offset to a purchased option

Intrinsic value of an option

Non-derivatives at FVTPL except


financial liability at FVTPL for
which change in FV attributable to
credit risk is presented in OCI

Spot element of a forward contract

Foreign currency risk component


of non-derivatives

A proportion of entire hedging


instrument, eg 50% of nominal
amount

Only contracts with external parties can be designated as hedging instruments


IFRS Foundation

Accounting: time value of options

Time value

Transactionrelated hedged
item, eg hedge
of a forecast
transaction

or

Time-period
related hedged
item, eg hedge
of an inventory
over period of
time

Option

Intrinsic value

Designate as
hedging
instrument
IFRS Foundation

Other
comprehensive
income
(accumulated in a
separate component
of equity)

Other
comprehensive
income
(accumulated in a
separate component
of equity)

Subsequent
measurement detailed rules
apply

Accounting: forward element of forward


contracts

Forward
element

Transactionrelated hedged
item, eg hedge
of a forecast
transaction

Spot element

Other
comprehensive
income
(accumulated in a
separate component
of equity)

or

Time-period
related hedged
item, eg hedge
of an inventory
over period of
time

Forward
contract

Designate as
hedging
instrument

IFRS Foundation

Other
comprehensive
income
(accumulated in a
separate component
of equity)

Subsequent
measurement detailed rules
apply

Qualifying items
Hedged items

The following are allowed as hedged items (can be a single item


or a group of items):

A recognised asset or liability


An unrecognised firm commitment
A forecast transaction (must be highly probable)
A net investment in a foreign operation

The hedge item must be reliably measurable


Only assets, liabilities, firm commitments or highly probable
forecast transactions with external parties can be designated as
hedged items
Exception: foreign currency risk of an intragroup monetary item, ie
forecast sales or purchases of inventories between members of
the same group if there is an outward sale of the inventory to a
party external to the group
IFRS Foundation

Hedged items

Designation of hedged
item

Entire item

Component

Risk component
(Separately identifiable and
reliably measurable)

A component
comprises less
than the entire
fair value change
or cash flow
variability of an
item

Nominal component or
selected contractual
cash flows

An entity may hedge a risk component of a non-financial item


IFRS Foundation

Hedged item
Group of items

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A group of items (including a group of items that constitute a net position) is an


eligible hedged item only if:

it consists of items
(including components of
items) that are,
individually, eligible
hedged items;

the items in the group are


managed together on a
group basis for risk
management purposes;

IFRS Foundation

in the case of a cash flow


hedge of a group of items
whose variabilities in cash
flows are not expected to
be approximately
proportional to the overall
variability in cash flows of
the group so that offsetting
risk positions arise:
- it is a hedge of foreign
currency risk; and
- the designation of that
net position specifies the
reporting period in which
the forecast transactions
are expected to affect
profit or loss, as well as
their nature and volume.

Hedged items

Designating a component of an overall group of items

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Two types of components can be designated as the hedged


item: a component that is a proportion of an entire item (ie
50% of the contractual cash flows of a loan) or a layer
component
A layer component of an overall group of items is eligible for
hedge accounting conditions:
separately identifiable and reliably measurable;
risk management objective = hedge a layer component;
items in the overall group from which the layer are identified are exposed to
the same hedged risk;
for a hedge of existing items an entity can identify and track the overall group
of items from which the hedged layer is defined; and
any items in the group that contain prepayment options meet the requirements
for components of a nominal amount
IFRS Foundation

Hedged items
Hedges of a group of items- nil net positions

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What are nil net positions?


Hedged items among themselves fully offset the risk that is managed on
a group basis.

Designating nil net positions in a hedging relationship that


does not include a hedging instrument conditions:
The hedge is part of a rolling net risk hedging strategy;
Hedged net position changes in size over the life of the rolling net risk
hedging strategy and the entity uses eligible hedging instruments to
hedge the net risk;
When net position is not nil and it is hedged with eligible hedging
instruments; and
not applying hedge accounting position would give rise to inconsistent
accounting outcomes
IFRS Foundation

Hedged items:
aggregated exposures
First hedging
relationship
Hedged item

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Second hedging
relationship
Hedged item

eg forecast purchase

includes the entire first


hedging relationship

Hedging
instrument

Hedging
instrument

eg futures contract

eg FX forward contract

Aggregate exposure a combination of an exposure that


would qualify as a hedged item
IFRS Foundation

Effectiveness
assessment

Measuring
hedge
ineffectiveness
Consider
combined
effect of items

Example:* aggregated exposures

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An entity may hedge a given quantity of highly probable coffee


purchases in 15 months time against price risk (based on US
dollars) using a 15-month futures contract for coffee.
The highly probable coffee purchases and the futures contract for
coffee in combination can be viewed as a 15-month fixed-amount
US dollar foreign currency risk exposure for risk management
purposes (ie like any fixed-amount US dollar cash outflow in 15
months time).

Refer to paragraph B6.3.3 of IFRS 9 Financial


Instruments
*

IFRS Foundation

Qualifying criteria

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Only eligible hedging


instruments and
hedged items

Qualifying criteria for


hedge accounting

Formal designation
and documentation

Economic relationship
between the hedged
item and the hedging
instrument exists

Meets the hedge


effectiveness
requirements

Effect of credit risk


does not dominate the
value changes

All 3 criteria to be met


Hedge accounting is elective
IFRS Foundation

Hedge ratio results


from the quantity of
hedged item and
hedging used to hedge

Hedge documentation

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Risk management objective and strategy

Identification of the hedging instrument

The related hedge item

The nature of the risk being hedged


How the entity will assess whether the hedging relationship meet the
hedge effectiveness requirements
IFRS Foundation

Hedge effectiveness requirements

Economic
relationship
between the
hedged item
and hedging
instrument

Credit risk does


not dominate
value changes of
the economic
relationship

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Hedge ratio
should be the
same as that
used for risk
management

If a hedging relationship ceases to meet the hedge effectiveness requirement relating


to the hedge ratio but the risk management objective for that designated hedging
relationship remains the same adjust the hedge ratio of the hedging relationship so
that it meets the qualifying criteria again (rebalancing)
IFRS Foundation

Hedge effectiveness

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Hedge effectiveness

Hedge
ineffectiveness

Extent to which changes


in the fair value or the
cash flows of the
hedging instrument
offset changes in the
fair value or the cash
flows of the hedged item

Extent to which the


changes in the fair value
or the cash flows of the
hedging instrument are
greater or less than
those on the hedged
item

Assess hedge effectiveness requirements at the inception of the hedging


relationship, and on an ongoing basis (ie at a minimum, at each reporting
date or upon a significant change in the circumstances, whichever comes
first)
IFRS Foundation

Categories of hedges

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Fair value
hedge

Hedge of the exposure to changes in FV of a recognised asset or liability or an


unrecognised firm commitment, or a component of any such item, that is attributable to a
particular risk and could affect profit or loss.
Example: hedge of exposure to changes in the fair value of a fixed-rate debt instrument
arising from changes in interest rates.

Cash flow
hedge

Hedge of the exposure to variability in cash flows that is attributable to a particular risk
associated with all, or a component of, a recognised asset or liability (such as all or some
future interest payments on variable-rate debt) or a highly probable forecast transaction,
and could affect profit or loss.
Example: the use of a swap to change floating rate debt (whether measured at amortised
cost or fair value) to fixed-rate debt (ie a hedge of a future transaction in which the future
cash flows being hedged are the future interest payments).

Hedge of a
net
investment
in a foreign
operation

As defined in IAS 21 The Effects of Changes in Foreign Exchange Rates (amount of the
reporting entitys interest in the net assets of that operation)

IFRS Foundation

Hedge accounting

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Fair value hedge (FVH):

Cash flow hedge (CFH):

the gain or loss on the hedging instrument


shall be recognised in profit or loss
the hedging gain or loss on the hedged item
shall adjust the carrying amount of the hedged
item (if applicable) and be recognised in profit
or loss

Exception: equity instruments at FVOCI:


effective & ineffective portion OCI

the separate component of equity associated


with the hedged item (cash flow hedge
reserve) is adjusted to the lower of the
following (in absolute amounts):
(i) the cumulative gain or loss on the hedging
instrument from inception of the hedge; and
(ii) the cumulative change in fair value
(present value) of the hedged item (ie the
present value of the cumulative change in the
hedged expected future cash flows) from
inception of the hedge.

the portion of the gain or loss on the hedging


instrument that is determined to be an
effective hedge shall be recognised in OCI.
any remaining gain or loss on the hedging
instrument is hedge ineffectiveness that shall
be recognised in profit or loss.

Hedges of a net investment in a foreign operation - treated similarly to CFH


IFRS Foundation

Modifying hedging relationship:


rebalancing

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Discontinue hedge relationship


No

Is the risk management objective


still the same?
Yes

Does the hedged ratio continue to


reflect the expected relationship
between hedged item and
hedging instrument?

No

Rebalance the hedging relationship

Yes

Yes

Continue hedge relationship

IFRS Foundation

Modifying hedging relationship:


mechanics of rebalancing
the weighting of the hedged
item can be increased (which at
the same time reduces the
weighting of the hedging
instrument) by:

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increasing the volume of


the hedged item; or

decreasing the volume of


the hedging instrument.

If a hedging relationship is
rebalanced, the adjustment to
the hedge ratio can be effected
in different ways:
the weighting of the hedging
instrument can be increased
(which at the same time
reduces the weighting of the
hedged item) by:

increasing the volume of


the hedging instrument; or

decreasing the volume of


the hedged item.

Changes in volume quantities that are part of the hedging relationship


IFRS Foundation

Discontinuing hedge accounting

Discontinue hedge accounting if:

Hedging relationship ceases to


meet qualifying criteria

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ie hedging instrument expires or


is sold, terminated or exercised

- Discontinue hedge accounting


prospectively
- Partial discontinuation possible
IFRS Foundation

Estimates and other


judgements

IFRS Foundation

Main judgements and estimates in applying


IFRS 9

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Hedge accounting
Whether the hedge accounting documentation provides
sufficient evidence to support the link between the
hedging relationship and the entitys risk management
objective.
Whether the hedging relationship meets the hedge
effectiveness requirements.
Assessing hedge effectiveness and determining hedge
ineffectiveness.
When a hedging relationship is rebalanced.
Determining when to discontinue hedge accounting.
IFRS Foundation

Disclosures

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Hedge accounting
disclosures

Risk
management
strategy

Amount,
timing and
uncertainty
of future
cash flows

Effects of
hedge
accounting
on the
primary
financial
statements

Specific
disclosures
for dynamic
strategies
and credit
risk hedging

Disclosure requirements refer to IFRS 7 Financial


Instruments: Disclosures paragraphs 21B-24F
IFRS Foundation

Project does not address macro hedging

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Even if IFRS 9 is applied, the specific portfolio hedge


accounting requirements in IAS 39 can still be used.
The IASB is
For now entities can choose to keep
simultaneously
using IAS 39 hedge accounting
working on a
specific project
to consider
IAS 39
IFRS 9
Accounting
accounting for
hedge
hedge
policy choice
macro hedges
accounting
accounting
(Discussion
Paper
published).

Effective date and transition

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Annual periods beginning on or after 1 January 2018


(early application of completed (whole) version permitted)

Prospective transition with limited exceptions


Retrospective application
o Required for time value of options
o Permitted for accounting for forward elements (if elected, applies to all such
hedging relationships)

On initial recognition
o Allowed to consider the moment IAS 39 ceases to apply and the moment from
which the new model applies as one point in time
o For rebalancing, the starting point will be the hedge ratio used under IAS 39
(any gains or losses will be recognised in profit or loss)

Hedging relationships that qualified under IAS 39 and qualify under


the new model will be treated as continuing hedging relationships