The general mechanics of how ongoing cash flow hedges are presented does not change compared with IAS 39. Entities would continue to accumulate in the hedging reserve (i.e., in equity, now in the standard called ‘cash flow hedge reserve’) the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item. This is often referred to as the ‘lower-of-test’ and basically assures that, in line with the IASB’s Conceptual Framework, an entity is not recognising an asset or liability that does not exist.
IFRS 9 is stricter than IAS 39 as to how the amount accumulated in the hedging reserve is subsequently accounted for, depending on the nature of the underlying hedged transaction:
- If the hedged transaction subsequently results in the recognition of a non-financial item, the amount accumulated in equity is removed from the separate component of equity and included in the initial cost or other carrying amount of the hedged asset or liability. This accounting entry, sometimes referred to as ‘basis adjustment’, does not affect OCI of the period.
- The above accounting treatment would equally apply to situations where the hedged forecast transaction of a non-financial asset or non-financial liability subsequently becomes a firm commitment for which fair value hedge accounting is applied.
- For any other cash flow hedges, the amount accumulated in equity is reclassified to profit or loss as a reclassification adjustment in the same period or periods during which the hedged cash flows affect profit or loss. This accounting entry does affect OCI of the period.
If cash flow hedge accounting is discontinued, the amount that has been accumulated in OCI shall:
- Remain in accumulated OCI if the hedged future cash flows are still expected to occur
- Be immediately reclassified to profit or loss as a reclassification adjustment if the hedged future cash flows are no longer expected to occur
After discontinuation, once the hedged cash flow occurs, any amount remaining in accumulated OCI shall be accounted for depending on the nature of the underlying transaction (as described above).
In contrast, IAS 39 provides an accounting policy choice to entities that hedge a forecast transaction resulting in the recognition of a non-financial item, to account for the amount accumulated in equity either as a basis adjustment or as a reclassification adjustment.
IFRS 9 also mentions ‘periods that interest income or interest expense is recognised’ as an example of a period over which the amount accumulated in the hedging reserve would have to be reclassified to profit or loss. This clarifies that entities cannot simply account for the net payment on an interest rate swap in profit or loss, but would have to present this as a reclassification adjustment between OCI and profit or loss.
Presentation – Cash flow hedges
Presentation – Cash flow hedges Presentation – Cash flow hedges Presentation – Cash flow hedges