share issuance, share buy-back, declaration of dividend) cannot be hedged items because the transaction will not affect P/L nor OCI which is a necessary ingredient of a cash flow hedge (IFRS 9.6.5.2).General business risks cannot be hedged items as they cannot be specifically identified and measured (IFRS 9.B6.3.1). I wrote a few articles about hedge accounting, therefore if you need to refresh your memory, here they are: Hedge accounting: IAS 39 vs. IFRS 9 It contains three main topics-This response has emerged as a response to the global IFRS 9 improves the decision usefulness of the financial instruments by aligning hedge accounting with the risk management activities of an entity.The definition remains the same with an option lying in the hands of the management, whether to implement the accounting in the organization, keeping in mind the costs and benefits associated with it.The primary purpose is to match the recognition of the derivative gains or losses with the underlying investment gains or losses.
B6.4.9). Whichever accounting requirements are applied (that is, IAS 39 or IFRS 9), the new hedge accounting disclosure requirements in IFRS 7 will be applicable. It is generally accepted that movement to a Stage 3 in See paragraphs IFRS 9.B6.4.7-8 for more discussion.As noted earlier, the hedge documentation should include the description of how the entity will assess whether the hedging relationship meets the hedge effectiveness requirements and its analysis of the sources of hedge ineffectiveness and how it determines the hedge ratio. However, it need not be contractually specified. When there is more than a one line affected, the allocation of gains/losses on hedging instrument should be done on a systematic and rational basis.
This condition will be met for the most common hedging instruments as they are contracted with respectable financial institutions and/or are cash collateralised. The purpose of a cash flow hedge is to defer the gain or loss on the hedging instrument to a period or periods in which the hedged expected future cash flows affect profit or loss. If they are no longer expected to occur, the amount accumulated in the cash flow hedge reserve is recycled to P&L (IFRS 9.6.5.12).As a rule, intragroup items cannot be considered to be hedged items in the consolidated financial statements (IFRS 9.6.3.5). The hypothetical derivative method compares the change in fair value or cash flows of the hedging instrument with the change in fair value or cash flows of a hypothetical derivative that represents the hedged risk.
receivables and payables) can be a hedged item if those subsidiaries have different functional currencies. However, in order to relieve entities from making constant adjustments to EIR, it is allowed to begin amortisation when the hedged instrument ceases to be adjusted for hedging gains and losses (IFRS 9.6.5.10).Cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, 1. a recognised asset or liability, 2. a highly probable forecast transaction or 3. a firm commitment (foreign currency risk only – IFRS 9.6.5.4) , and could affect P/L (IFRS 9.6.5.2(b)). Entity A considers that straight-line method will provide a systematic and rational basis of amortisation to P/L of the time value of the interest rate cap. The premium paid amounts to $100k.
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IAS 39 did include such a guidance, which can be considered to be still valid and can be found in paragraph IAS 39.F.3.7.IFRS 9 allows a group of items, including a group of items that constitute a net position, to be an eligible hedged item if the criteria set out in paragraph IFRS 9.6.6.1 are met.See paragraphs IFRS 9.B6.6.1-6 for more discussion.Similarly to individual items, components of a group of items can also be designated as hedged items provided the criteria in paragraphs IFRS 9.6.6.2-3 are met.For a hedge of a net position whose hedged risk affects different line items in P/L or OCI, any hedging gains or losses should be presented in a line separate from those affected by the hedged items (IFRS 9.6.6.4).A nil net position is a situation where hedged items among themselves fully offset the risk that is managed on a group basis. IFRS 9 gives an example of commodity inventory that is hedged against a fair value decrease for six months using a commodity option (IFRS 9.B6.5.29(b)).