The newly introduced concept of rebalancing only comprises changes to the hedge ratio to reflect expected changes in the relationship between the hedged item and the hedging instrument. Any other changes made to the quantities of the hedged item or hedging instrument would not be rebalancing (with the consequence that it would most likely need to be treated as a partial discontinuation if the entity reduces the extent to which it hedges, and a new designation of a hedging relationship if the entity increases it).
Therefore, rebalancing is only relevant if there is basis risk between the hedged item and the hedging instrument. It only affects the expected relative sensitivity between the hedged item and the hedging instrument going forward, as ineffectiveness from past changes in the sensitivity will have already been recognised in profit or loss.
Requirement to rebalance
Whether an entity has to rebalance a hedging relationship is first and foremost a matter of fact, which is, whether the hedge ratio has changed for risk management purposes. An entity has to rebalance a hedging relationship if that relationship still has an unchanged risk management objective but no longer meets the hedge effectiveness requirements regarding the hedge ratio. This will, in effect, be if the hedge ratio is no longer that actually used for risk management (see ‘Setting the hedge ratio‘).
However, as on initial designation, the hedge ratio for hedge accounting purposes would have to differ from the hedge ratio used for risk management if the latter would result in ineffectiveness that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting.
IFRS 9 clarifies that ‘not every change in the extent of offset between the … hedging instrument and the hedged item … constitutes a change in the relationship’ that requires rebalancing. For example, hedge ineffectiveness arising from a fluctuation around an otherwise valid hedge ratio cannot be reduced by adjusting the hedge ratio. A trend in the amount of ineffectiveness on the other hand might suggest that retaining the hedge ratio would result in increased ineffectiveness going forward. IFRS 9 further clarifies that an accounting outcome that would be inconsistent with the purpose of hedge accounting as the result of failing to adjust the hedge ratio for risk management purposes, would not meet the qualifying criteria for hedge accounting. This simply means that the qualifying criteria treat inappropriate hedge ratios in the same way, irrespective of whether they were achieved by acting (inappropriate designation) or failure to act (by not adjusting a designation that has become inappropriate). Requirement to rebalance
Mechanics of rebalancing