IFRS 9 also introduces a new accounting treatment for currency basis spreads. The currency basis spread, a phenomenon that became very significant during the financial crisis, is a charge embedded in financial instruments that compensates for aspects such as country and liquidity risk. This charge only applies to transactions involving the exchange of foreign currencies at a future point in time (as, for example, in currency forward contracts or CCIRS).
Historically, the difference between the spot and forward prices of currency forward contracts and CCIRS represented the differential between the interest rates of the two currencies involved. However, basis spreads increased significantly during the financial crisis and with the following sovereign debt crisis, and have become a significant and volatile component of the pricing of longer term forward contracts and CCIRS. Foreign currency basis spreads
The standard cites currency basis spread as an example of an element that is only present in the hedging instrument, but not in a hedged item that is a single currency instrument. Consequently, this would result in some ineffectiveness even when using a hypothetical derivative for measuring ineffectiveness (see ‘Hypothetical derivatives for measuring ineffectiveness‘).
When using a foreign currency forward contract or a CCIRS in a hedge, the currency basis spread is an unavoidable ‘cost’ of the hedging instrument. During its redeliberations leading to the published final standard, the Board decided that currency basis spreads are a ‘cost of hedging’. The cost of a hedging activity should be recognised in profit or loss at the same time as the hedged transaction. Consequently, the Board decided to expand the requirements regarding the accounting for costs of hedging to also include currency basis spreads in a way similar to the forward element of forward contracts. This means that, when designating a hedging instrument, an entity can exclude the currency basis spread and account for it separately in the same way as the accounting for the forward element of the forward rate, as described in ‘General requirements‘. However, if an entity designates the entire hedging instrument, fair value changes due to changes in the currency basis spread would result in some ineffectiveness.