7.3.3.A
Forward currency contracts hedging a net
investment ...................................................................... 4084
7.3.3.B
Cross currency interest rate swaps hedging a
net investment ............................................................... 4085
7.3.3.C Purchased
options
hedging a net investment .......... 4086
7.3.4
Combinations of derivative and non-derivative
instruments hedging a net investment ........................................... 4086
7.3.5 Individual
or
separate
financial statements .................................. 4087
7.4
Measuring ineffectiveness................................................................................ 4087
7.4.1
General requirements ....................................................................... 4087
7.4.2
The time value of money ................................................................. 4088
7.4.3
Calculation of ineffectiveness ......................................................... 4089
7.4.4
Other ineffectiveness measurement issues .................................. 4089
7.4.4.A
Hypothetical derivatives ............................................. 4089
7.4.4.B
Hedging using instruments with a non-zero
fair value ......................................................................... 4091
7.4.4.C Discount
rates for calculating the fair value of
actual and hypothetical derivatives .......................... 4091
7.4.4.D Foreign
currency
basis spreads .................................. 4093
7.4.4.E
Detailed example of calculation of
ineffectiveness for a cash flow hedge ....................... 4093
7.4.5
Comparison of spot rate and forward rate methods .................. 4099
7.4.6
The impact of the hedging instrument’s credit quality ............... 4103
Financial instruments: Hedge accounting 3967
7.4.7
Interest accruals and ‘clean’ versus ‘dirty’ values ......................... 4105
7.4.8 Effectiveness
of options .................................................................... 4105
7.4.9
Hedged items with embedded optionality ................................... 4106
7.5
Accounting for the costs of hedging .............................................................. 4108
7.5.1
Time value of options ....................................................................... 4108
7.5.1.A
Aligned time value .......................................................... 4111
7.5.2
Forward element of forward contracts .......................................... 4113
7.5.2.A
Forward element of forward contracts in a net
investment hedge ........................................................... 4115
7.5.3
Foreign currency basis spreads in financial instruments ............ 4116
7.5.3.A
Measurement of the costs of hedging for
foreign currency basis spread ....................................... 4117
7.6
Hedges of a firm commitment to acquire a business .................................. 4120
7.7
Hedge accounting for a documented rollover hedging strategy ............... 4121
8 SUBSEQUENT ASSESSMENT OF EFFECTIVENESS, REBALANCING AND
DISCONTINUATION ..................................................................................... 4122
8.1
Assessment of effectiveness ............................................................................. 4122
8.2 Rebalancing .......................................................................................................... 4123
8.2.1
Definition ............................................................................................. 4123
8.2.2
Requirement to rebalance ................................................................ 4125
8.2.3 Mechanics
of
rebalancing ................................................................. 4126
8.3
Discontinuation ................................................................................................... 4129
8.3.1
Discontinuing fair value hedge accounting ................................... 4134
8.3.2
Discontinuing cash flow hedge accounting ................................... 4134
8.3.2.A
Impact of novation to central clearing parties
on cash flow hedges ...................................................... 4134
8.3.2.B
The impact of the introduction of settle to
market derivatives on cash flow hedges ................... 4136
8.3.2.C
The replacement of IBOR benchmark interest
rates .................................................................................. 4137
8.3.3
Disposal of a hedged net investment .............................................. 4137
9 PRESENTATION .......................................................................................... 4138
9.1
Cash flow hedges ................................................................................................ 4139
9.2
Fair value hedges ................................................................................................ 4139
9.3
Hedges of groups of items ................................................................................ 4140
9.3.1
Cash flow hedges ............................................................................... 4140
9.3.2 Fair
value
hedges ............................................................................... 4140
9.4
Costs of hedging .................................................................................................. 4141
10 DISCLOSURES............................................................................................... 4141
10.1 Background and general requirements .......................................................... 4142
3968 Chapter 49
10.2 Risk
management strategy ................................................................................ 4142
10.3 The amount, timing and uncertainty of future cash flows ......................... 4144
10.4 The effects of hedge accounting on the financial position and
performance......................................................................................................... 4145
11 MACRO HEDGING ........................................................................................ 4147
11.1
Accounting for dynamic risk management .................................................... 4148
11.2 Applying hedge accounting for macro hedging strategies under
IFRS 9 .................................................................................................................... 4149
12 ALTERNATIVES TO HEDGE ACCOUNTING ................................................ 4150
12.1 Credit risk exposures ..................................
....................................................... 4150
12.2 Own use contracts .............................................................................................. 4152
13 EFFECTIVE DATE AND TRANSITION .......................................................... 4153
13.1 Effective date ....................................................................................................... 4153
13.2 Prospective
application in general .................................................................. 4154
13.3 Limited
retrospective application ................................................................... 4154
13.3.1
Accounting for the time value of options ...................................... 4155
13.3.2
Accounting for the forward element of forward contracts ........ 4155
13.3.3
Accounting for foreign currency basis spread .............................. 4156
13.3.4
Re-designation of hedge relationships for non-financial risk
components .......................................................................................... 4156
13.3.5
Designation of own use contracts at fair value through
profit or loss ......................................................................................... 4158
14 MAIN DIFFERENCES BETWEEN IFRS 9 AND IAS 39 HEDGE
ACCOUNTING REQUIREMENTS .................................................................. 4158
14.1 The objective of hedge accounting ................................................................. 4158
14.2 Eligible hedged items ......................................................................................... 4159
14.3 Eligible
hedging instruments ............................................................................ 4159
14.4 Effectiveness
criteria
......................................................................................... 4160
14.5 Discontinuation
..................................................................................................
4160
14.6 Hedge
accounting mechanisms ....................................................................... 4161
List of examples
Example 49.1:
Hedge of a contractually specified risk component – coal
supply contract linked to the coal benchmark price and
the Baltic Dry Index .......................................................................... 3982
Financial instruments: Hedge accounting 3969
Example 49.2:
Identification of a benchmark interest rate component in
fixed rate debt .................................................................................... 3984
Example 49.3:
Identification of a benchmark interest rate component in
Government bonds ............................................................................ 3984
Example 49.4:
Hedge of a non-contractually specified risk component –
coffee purchases with a benchmark price risk component ...... 3985
Example 49.5:
Partial term hedging .......................................................................... 3987
Example 49.6:
Foreign currency borrowings hedging fixed assets .................... 3988
Example 49.7:
Foreign currency risk associated with equity shareholding ..... 3988
Example 49.8:
Hedge of foreign currency denominated commodity risk ........ 3989
Example 49.9:
Inflation risk as an eligible risk component of a debt
instrument ........................................................................................... 3990
Example 49.10:
Hedging a top layer of a loan prepayable at fair value ............... 3992
Example 49.11:
Hedging a bottom layer including prepayment risk ................... 3992
Example 49.12:
Hedging a bottom layer (no prepayment risk) of a loan
portfolio ............................................................................................... 3993
Example 49.13:
Hedging a proportion of a prepayable loan portfolio ................ 3994
Example 49.14:
Sub-LIBOR issue – Selling crude oil at below benchmark
price ...................................................................................................... 3996
Example 49.15:
Hedge of a portion of an existing fixed rate financial asset
following a rise in interest rates ...................................................... 3997
Example 49.16:
Negative interest rates and fair value hedges .............................. 3998
Example 49.17:
Hedging a portfolio of shares .......................................................... 3999
Example 49.18:
Hedging a top layer of a portfolio of financial liabilities ........... 3999
Example 49.19:
Economic ‘natural hedge’ of foreign currency cash flows ....... 4000
Example 49.20:
Cash flow hedge of a foreign currency net position .................. 4001
Example 49.21:
Interest rate risk managed separately from a credit risk
portfolio managed on a fair value basis ......................................... 4007
Example 49.22:
Aggregated exposure – copper purchase in a foreign
currency ................................................................................................ 4011
Example 49.23:
Fixed rate loan in a foreign currency – cash flow hedge of
an aggregated exposure ..................................................................... 4013
Example 49.24:
Floating rate loan in a foreign currency – fair value hedge
of an aggregated exposure ................................................................ 4015
Example 49.25:
Hedge of a commodity price risk as an aggregated
exposure in a cash flow hedge of foreign currency risk ............. 4017
Example 49.26:
Aggregated exposure – interest rate pre-hedge of forecast
foreign currency debt issue ............................................................. 4019
Example 49.27:
Cash flow hedging of an exposure that includes a net
investment in a foreign operation .................................................. 4020
Example 49.28:
Hedging foreign exchange risk of a forecast transaction
using a combined option instrument ............................................. 4022
Example 49.29:
Foreign currency collar (or ‘cylinder option’) .............................. 4022
3970 Chapter 49
Example 49.30:
‘Knock-out’ swap ............................................................................... 4023
Example 49.31:
Hedging with a sales commitment ................................................. 4023
Example 49.32:
Hedge of a forecast commodity purchase with an
investment in a commodity fund or an exchange traded
commodity .......................................................................................... 4025
Example 49.33:
Hedging with a non-derivative liability ........................................ 4026
Example 49.34:<
br />
Hedge of foreign currency bond .................................................... 4026
Example 49.35:
Hedging with a combination of a derivative and non-
derivative instrument ........................................................................ 4027
Example 49.36:
Designation of hedging instrument with longer life than
hedged item ......................................................................................... 4030
Example 49.37:
Foreign currency forward hedging position arising from
two hedged items with different foreign currencies .................. 4030
Example 49.38:
Cross-currency interest rate swap hedging two foreign
currency exchange rate exposures and fair value interest
rate exposure ....................................................................................... 4031
Example 49.39:
Internal derivatives ........................................................................... 4033
Example 49.40:
Single external derivative offsets internal contracts on a
net basis ............................................................................................... 4036
Example 49.41:
Using internal derivatives to hedge foreign currency risk ........ 4037
Example 49.42:
Intragroup monetary items that will affect consolidated profit
or loss .................................................................................................... 4044
Example 49.43:
Subsidiary’s foreign exchange exposure hedged by parent ...... 4045
Example 49.44:
Subsidiary’s foreign exchange exposure hedged by parent
(2) .......................................................................................................... 4046
Example 49.45:
Hedge of anticipated issuance of fixed rate debt ........................ 4048
Example 49.46:
Nature of the hedged risk in a net investment hedge ................. 4051
Example 49.47:
Amount of hedged item in a net investment hedge .................... 4052
Example 49.48:
Amount of hedged item in a net investment hedge
(different hedged risks) ..................................................................... 4052
Example 49.49:
Hedge accounting applied by intermediate parent .................... 4053
Example 49.50:
Risk management strategies with related risk management
objectives .............................................................................................. 4056
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 785