IFRS 9 - hedge accounting

Question 1

When should hedge accounting be applied?

Answer 1

Hedge accounting is optional for an entity, which allows an entity to reflect the substance of the hedging activities so that any gains/losses on the hedged item and hedging instrument are recognised in the same accounting period and in the same section of the FS (i.e. SoCI or SoPL).

Question 2

What are the type of hedging relationships

Answer 2

Cash flow hedge
Fair value hedge
Net Investment hedge

Question 3

What is the main difference between the fair value and the cash flow hedge?

Answer 3

The Fair value hedge is to reflect the changes in fair value of a hedged item and hence changes in the fair value of the hedging instrument would be recorded in profit or loss for the period.

For cash flow hedges, often the transaction has not yet taken place and hence it is recorded in OCI.

Question 4

what may be considered a hedged item?

Answer 4

An asset/liability, unrecognised firm commitment (i.e. agreement to purchase good or service at set date/amount), highly probable forecast transaction or net investment in fair value or future cash flows, and: (i) exposes the entity to risk of changes in fair value or future cash flows; and (ii) is designated as being hedged.

Question 5

How do you hedge an equity item carried at FVOCI?

Answer 5

This would be a fair value hedge - however, the gains and losses would also be recognised in OCI for the period.

Question 6

Can forecast transactions be considered as hedging instruments?

Answer 6

• Forecast transactions may be consdiered as hedged items only if the transaction is highly probable. Example forecast transaction is the anticipated issue of fixed rate debt (cash flow hedge), or expected future forex revenue streams - e.g. airlines estimate sales of x million based on previous data, and hedges the forex sales, the revenues may be considered a hedged item. The gain or loss from a forecast transaction should be recognised in OCI until the revenues occur (as they have not yet been realised). All forecast transactions can only be considered as cash flow hedges.

Question 7

What are the conditions for hedging instruments?

Answer 7

• the hedging relationship consists of eligible items and instruments
• there is a formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge.
• the hedging relationship meets the requirements to be considered effective.

Question 8

What are the hedge effectiveness requirements?

Answer 8

(1) an existing relationship exists between the hedged item and tehe hedging requirements - i.e. the hedging instrument and the hedged item are expected to have offsetting changes in value
(2) The effect of credit risk does not dominate the value changes - i.e. the value change due to credit risk are not the drive of value change of either the hedging item or hedging instrument
(3) the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of the hedged item