Under IAS 39, inflation cannot be designated as a hedged risk component for financial instruments, unless the inflation risk component is contractually specified. For non-financial instruments, inflation risk cannot be designated under IAS 39 as a risk component at all. Inflation as a risk component
For financial instruments, IFRS 9 introduces a rebuttable presumption that, unless contractually specified, inflation is not separately identifiable and reliably measurable. This means that there are limited cases under which it is possible to identify a risk component for inflation and designate that inflation component in a hedging relationship. Similar to other non-contractually specified risk components, the analysis would have to be based on the particular circumstances in the respective market, which is, in this case, the debt market.
The example below, derived from the application guidance of IFRS 9, explains a situation in which the presumption that inflation does not qualify as a risk component of a financial instrument can be rebutted.
There are not many currencies with a liquid market for inflation-linked debt instruments, therefore, limiting the availability of designating non-contractually specified inflation risk of financial instruments. Inflation as a risk component
IFRS 9 does not specify whether the analysis of inflation as eligible risk component has to be made by currency or by country, or both. This is particularly relevant for countries forming a monetary union together with other countries, but having different inflation rates (e.g., within the Eurozone). The relevant ‘market structure’ for inflation will usually be given by the currency.
While IFRS 9 defines in what circumstances inflation can be a risk component for a financial instrument, inflation can, in future, be treated as a risk component for non-financial items in the same manner as any other risk component (as described in ‘Contractually specified risk components‘ and ‘Non-contractually specified risk components‘, i.e., the rebuttable presumption applies only to financial instruments). For example, a contractually specified inflation risk component would normally qualify as a hedged item (e.g., a sales contract with a price formula linked to the consumer price index) under IFRS 9, whereas it would not under IAS 39. Inflation as a risk component