IFRS 9 Assessment of hedging relationships

Natural disasters – Hedge accounting

The natural disaster and potential subsequent events can disrupt many business transactions that may be postponed or cancelled. For example, entities may have been forecasting purchases of local goods or sales of their goods to local entities. Prior to the disaster, many such transactions may have constituted ‘highly probable’ hedged transactions in cash flow hedges under IFRS 9 Financial instruments (or IAS 39, if still applicable). However, purchases and sales that were considered highly probable a few weeks prior to the natural disaster, may no longer be highly probable (in full or partially) or may not be expected to occur at all. Natural disasters – Hedge accounting

Entities consider whether any hedges of forecast transactions may cease to qualify for … Read more

Setting the hedge ratio

The hedge ratio is the ratio between the amount of hedged item and the amount of hedging instrument. For many hedging relationships, the hedge ratio would be 1:1 as the underlying of the hedging instrument perfectly matches the designated hedged risk.

For a hedging relationship with a correlation between the hedged item and the hedging instrument that is not a simple 1:1 relationship, risk managers will generally set the hedge ratio so as to adjust for the type of relation in order to improve the effectiveness (i.e., the hedged ratio may be different to 1:1).

Accordingly, the third effectiveness requirement is that the hedge ratio used for accounting should be the same as that used for risk management purposes.

This Read more

Subsequent assessment of effectiveness

The subsequent assessment of effectiveness has become less burdensome, but an entity must use a method that captures the relevant characteristics of the hedging relationship, including the sources of hedge ineffectiveness that are expected to affect the hedging relationship during its term. Depending on those factors, entities can perform either a qualitative or a quantitative assessment. For example, in a simple hedge where all the critical terms match (or are only slightly different), a qualitative test might be sufficient. On the other hand, in highly complex hedging strategies, some type of quantitative analysis would likely need to be performed.

Entities no longer need to perform a retrospective quantitative effectiveness assessment using the 80% – 125% bright lines. However, this does Read more

Rebalancing – Definition

The newly introduced concept of rebalancing only comprises changes to the hedge ratio to reflect expected changes in the relationship between the hedged item and the hedging instrument. Any other changes made to the quantities of the hedged item or hedging instrument would not be rebalancing (with the consequence that it would most likely need to be treated as a partial discontinuation if the entity reduces the extent to which it hedges, and a new designation of a hedging relationship if the entity increases it).

Therefore, rebalancing is only relevant if there is basis risk between the hedged item and the hedging instrument. It only affects the expected relative sensitivity between the hedged item and the hedging instrument going forward, Read more

Mechanics of rebalancing

Rebalancing can be achieved by:

  • Increasing the volume of the hedged item
  • Increasing the volume of the hedging instrument
  • Decreasing the volume of the hedged item


  • Decreasing the volume of the hedging instrument

Decreasing the volume of the hedging instrument or hedged item does not mean that the respective transactions or items no longer exist or are no longer expected to occur. As demonstrated in the example below, rebalancing only changes what is designated in the particular hedging relationship.

In the example above, the entity no longer needs to hold this portion of the derivative any longer for hedging purposes and could, therefore, close it out. As mentioned, the entity could have also rebalanced by designating more WTI exposure Read more

Discontinuation hedge accounting

An entity would have to discontinue hedge accounting if the qualification criteria are no longer met. As also mentioned at ‘Assessment of effectiveness‘, this includes if the risk management objective for the hedging relationship has changed.

In an important change to IAS 39, IFRS 9 now introduces ‘partial discontinuation’ of hedge accounting, which means that hedge accounting continues for the remaining part of the hedging relationship.

The table below summarises the main scenarios resulting in either full or partial discontinuation:



The risk management objective has changed

Full or partial

There is no longer an economic relationship between the hedged item and the hedging instrument


The effect of credit risk dominates the value changes of the

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