IFRS 9 - Financial Instruments (Hedging) Flashcards
What are the objectives of hedging?
Companies enter into hedging arrangements in order to manage risk exposure.
Risk management activity - risk profile
Applying IFRS requirements to activities that manage risk can result in challenges.
IFRS 9 seeks to ‘represent, in the financial statements, the effect of an entity’s risk management activities’
IFRS 9 also seeks to convey the context of hedging instruments for which hedge accounting is applied in order to allow insight into their purpose and effect.
All of this reduces accounting mismatch.
What are on some issues to consider with hedging?
Are gains/losses on the hedged instrument (i.e., the commodities futures contract) in the same period? Or in the same place in the financial statements as gains or losses on the hedged exposure?
IFRS 9 Hedging seeks to ensure that these issues are consistent to ensure mismatch does not occur.
What classifies as a hedged item?
According to IFRS 9 a hedged item can be:
A recognised asset or liability
An unrecognised firm commitment
A highly probable forecast transaction
A net investment in a foreign operation
All of the above must be with an external party
Singles item or a group of items
What are the three main categories of hedges?
Fair-value hedges
Cash-flow hedges
Net-investment hedges
What are fair-value hedges?
Hedge of the exposures to changes in fair value of a recognised asset or liability or unrecognised firm commitment, or a component of any such item, that is attributable to a particular could affect profit or loss.
Problem: “fixed item” worried about its value fluctuating
What are cash-flow hedges?
A hedge of the exposure to variability in cash flows that attributable to a particular risk associated with all or a component of a recognised asset or liability or a highly probable forecast transaction, and could affect profit or loss.
Problem: “Variable item” - worried it might get less money or you have to pay more money in the future than now.
