IFRS 9 Other Hedge Accounting Relationships |

Hedges of exposures affecting OCI

Hedges of exposures affecting other comprehensive income Hedges of exposures affecting OCI

Only hedges of exposures that could affect profit or loss qualify for hedge accounting. The sole exception to this rule is when an entity is hedging an investment in equity instruments for which it has elected to present changes in fair value in OCI, as permitted by IFRS 9. Using that election, gains or losses on the equity investments will never be recognised in profit or loss.

For such a hedge, the fair value change of the hedging instrument is recognised in OCI. Ineffectiveness is also recognised in OCI. On sale of the investment, gains or losses accumulated in OCI are not reclassified to profit or loss.

Consequently, Read more

Hedge accounting requirements

IFRS 9 now allows, for fair value hedges, the designation of layer components from a defined nominal amount or a defined, but open, population. IFRS 9 still includes some restrictions, in particular that a layer component that includes a prepayment option does not qualify as a hedged item in a fair value hedge if the fair value of the prepayment option is affected by changes in the hedged risk.

When an entity has an option to prepay a loan, at fair value, the fair value of the option is not affected by changes in the hedged risk. Consequently, an entity would be able to designate a hedge as described in this example:

This example above, of a hedge of a Read more

Groups of items Hedging

Hedge accounting under IAS 39 was primarily designed from a single instrument viewpoint. A hedging relationship would typically include a single hedging instrument (e.g., an interest rate swap) hedging a single item (e.g., a loan). However, for operational reasons entities often economically hedge several items together on a group basis. IAS 39 allows several items to be hedged together as a group, but there are restrictions such that there are relatively few types of groups that are eligible as hedged items.

In an effort to address the issues raised by these restrictions, the IASB has broadened the eligibility criteria for groups of items in IFRS 9.

General requirements Groups of items Hedging

Under IAS 39, a group of items is Read more

Hedging a component of a group

A group designation can also consist of hedging a component of a group of items, such as a layer component of a group. A component could also be a proportion of a group of items, such as 50% of a fixed rate bond series with a total volume of CU 100m. Whether an entity designates a layer component or a proportionate component depends on the entity’s risk management objective.

The benefits of identifying a layer component, discussed at ‘Hedge accounting requirements in IFRS 9‘, may be even more relevant when applied to a group of items. A bottom layer hedging strategy is, in fact, a designation of a component of a group.

Examples are as follows:

  • A bond
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Time value of options

Other changes from IAS 39

The fair value of an option consists of the intrinsic value and the time value. When using an option for hedging activities, only the intrinsic value is used for offsetting the fair value changes attributable to the hedged risk (unless the hedged item is also an option, see ‘Hedged items‘). Unchanged from IAS 39, an entity can either designate an option as a hedging instrument in its entirety, or it can separate the intrinsic value and the time value and designate only the

Under IAS 39, when designating the option in its entirety as a hedge of a non-option item, changes in the portion of the fair value attributable to the time value Read more