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 eligible as a designated hedged item for accounting purposes only if:
- The individual items within the group share the same designated risk exposure.
- The change in the fair value attributable to the hedged risk for each individual item in the group is ‘approximately proportional’ to the overall change in the fair value attributable to the hedged risk of the group.
Many hedges will fail to fulfill the second criterion. For example, when hedging a portfolio of shares that replicates a market index, the individual shares would usually not move in tandem with the entire portfolio.
In contrast, under IFRS 9, hedge accounting may be applied to a group of items if: Groups of items Hedging
- The group consists of items or components of items that would individually qualify for hedge accounting.
- For risk management purposes, the items in the group are managed together on a group basis.
Whether the items in the group are managed together on a group basis is a matter of fact, i.e., it depends on an entity’s behavior and cannot be achieved by mere documentation.