item in a second hedging relationship is not possible under IAS 39 (see 2.7 above). In order
to achieve hedge accounting for the hedging instrument in the ‘second hedge relationship’,
under IAS 39 the first hedge relationship would need to be de-designated and a new hedge
relationship with a combined hedge instrument (i.e. the hedging instrument from the first
and second hedge relationship) would need to be designated. The combined hedging
derivative is likely to have a non-zero fair value which could result in additional
ineffectiveness for a cash flow hedge (see 7.4.4.B above).
In addition IAS 39 includes a complete prohibition on designating inflation as a risk
component unless there is a contractually specified inflation portion, which is a harsher
position than in IFRS 9 (see 2.2.6 above). [IAS 39.AG99F].
IAS 39 also permits designation of groups of hedged items, however the designation of
a net position is prohibited under IAS 39, only gross designations are allowed. [IAS 39.84].
In addition, groups of hedged items are only eligible for designation if the change in fair
value attributable to the hedged risk for each individual item in the group was expected
to be approximately proportional to the overall change in fair value attributable to the
hedged risk of the group of items. [IAS 39.83]. This requirement does not form part of
IFRS 9 hedge accounting (see 2.5 above).
Although a hedge of a component is permitted under IAS 39, the type of eligible
component is more restrictive than under IFRS 9 (see 2.3 above). For example it is not
possible to designate a layer of a hedged item in a fair value hedge. In order to achieve
hedge accounting, designation of a proportion or specific cash flows within the hedged
item would be required. [IAS 39.AG99BA].
14.3 Eligible hedging instruments
Under IFRS 9 it is possible to designate, as hedging instruments, non-derivative
financial assets or non-derivative financial liabilities that are accounted for at fair
value through profit or loss (except for financial liabilities designated at fair value
through profit or loss). [IFRS 9.6.2.2]. However, this is not possible under IAS 39. It was
previously possible only to designate a non-derivative financial instrument as the
hedging instrument for a hedge of foreign currency risk, which is of course still
permitted under IFRS 9. [IAS 39.72].
Similar to IFRS 9, a standalone written option is prohibited from qualifying as a
hedging instrument under IAS 39, unless it is as an offset to a purchased option,
including one that is embedded in another financial instrument (see 3.2 above).
However, IAS 39 does not allow standalone written options to be designated within a
4160 Chapter 49
combination of other hedging derivatives, even if the combination of all the
derivatives is not a net written option. [IAS 39.AG94].
14.4 Effectiveness
criteria
Perhaps the most significant difference between IAS 39 and IFRS 9 is the criteria as to
whether a hedge relationship is eligible for hedge accounting or not. Whilst IFRS 9 takes
a principle-based approach (see 6.4 and 14.1 above), the eligibility criteria under IAS 39
are more rules based. In particular, IAS 39 requires that:
• the entity should expect the hedge to be highly effective in achieving offsetting changes
in fair value or cash flows attributable to the hedged risk, consistent with the originally
documented risk management strategy for that particular hedging relationship;
• the hedge should be assessed on an ongoing basis and determined actually to have
been highly effective throughout the financial reporting periods for which the
hedge was designated; [IAS 39.88]
• a hedge is regarded as highly effective only if both of the following conditions are met:
i) at the inception of the hedge, and in subsequent periods, the hedge is
expected to be highly effective in achieving offsetting changes in fair value or
cash flows attributable to the hedged risk during the period for which the
hedge is designated; and
ii) the actual results of the hedge are within a range of 80% to 125%.
For example, if actual results are such that the loss on the hedging instrument
is €120 and the gain on the cash instrument is €100, offset can be measured
by 120 ÷ 100, which is 120%, or by 100 ÷ 120, which is 83%. In this example,
assuming the hedge meets the condition in (i), it would be concluded that the
hedge has been highly effective. [IAS 39.AG105(b)].
It can be seen that IAS 39 requires that hedge relationships pass both a retrospective
and prospective effectiveness test in order to achieve hedge accounting. The test itself
is more restrictive, as it includes the requirement to achieve an arbitrary 80%-125% level
of offset. The IFRS 9 effectiveness requirements are only forward looking, will normally
be qualitative and permit judgement as to whether the requirements are met (see 8
above). Hence many more hedge relationships are precluded from hedge accounting
under the stricter IAS 39 effectiveness tests. However, the requirement to measure and
record any ineffectiveness is consistent under both IFRS 9 and IAS 39 (see 7.4 above).
[IAS 39.89, 96].
14.5 Discontinuation
There is significant overlap in the guidance on discontinuation of hedge accounting
under IAS 39 and IFRS 9, however there are some important differences. Whilst
discontinuation of a hedge relationship is only permitted under IFRS 9 if one of the
mandatory discontinuation criteria occur (see 8.3 above), there is no prohibition on
voluntary discontinuation of designated hedge relationships under IAS 39. An entity can
just choose to prospectively stop hedge accounting. [IAS 39.91(c), 101(d)].
If the IAS 39 effectiveness test is failed (see 14.4. above), then the hedge relationship
must be discontinued and hedge accounting ceases from the last time the hedge
Financial instruments: Hedge accounting 4161
relationship was effective. Under IAS 39 there is no opportunity to rebalance the hedge
relationship, amend the method of assessing effectiveness or undertake a partial
discontinuation (see 8.2, 6.3 and 8.3 above). [IAS 39.91(b), 101(b)]. In addition under IFRS 9,
if discontinuation is required, this is only applied prospectively (see 8.3 above).
The risk management objective plays a much more important role within IFRS 9 hedge
accounting than under IAS 39 (see 14.1 above). For example there is no requirement to
monitor whether the risk management objective has changed under IAS 39, as such a change
is not one of the mandatory discontinuation criteria as it is under IFRS 9 (see 8.3 above).
14.6 Hedge accounting mechanisms
The basic IAS 39 hedge accounting mechanics are the same as those under IFRS 9 (see 7
above). However IFRS 9 contains some new accounting mechanisms that do not appear
within IAS 39.
Although it is possible under IAS 39 to exclude the time value of a hedging option and the
forward element of a forward contract from the hedging derivative, similar to IFRS 9
(see 3.6.4 and 3.6.5 above), the accounting treatment of the excluded components differ.
Under IAS 39, it is not possible to apply the costs of hedging accounting to the excluded
time valu
e of an option or the forward element of a forward contract (see 7.5 above).
Accordingly the excluded portions will remain at fair value through profit or loss. So
although the excluded time value or forward element do not affect the hedge
effectiveness assessment (see 14.4 above), they are likely to result in profit or loss volatility
under IAS 39. [IAS 39.74]. It is also worth noting that under IAS 39 there is no opportunity
to exclude the cross currency basis from a hedging derivative (see 7.5.3 above).
IFRS 9 includes two alternatives to hedge accounting: the fair value option for credit
risk exposures (see 12.1 above) and a fair value option for own use contracts (see 12.2
above). Neither of these alternatives are available under IAS 39.
References
1 For example, see IAS
39 (2000), Financial
9 Information for Observers (February
2007
Instruments: Recognition and Measurement,
IASB meeting), Business Combinations II:
IASC, December 1998 to October 2000, para. 10.
Reassessments (Agenda Paper 2B), IASB,
2
Press Release, IASB sets out timetable for
February 2007, para. 28 and Information for
IAS 39 replacement and its conclusions on
Observers (April 2007 IASB meeting),
FASB FSPs, IASB, April 2009.
Classification and Designation of Assets,
3
Press
Release,
Draft of forthcoming IFRS on
Liabilities and Equity Instruments Acquired or
general hedge accounting, September 2012.
Assumed in a Business Combination (Agenda
4
DP/2014/1 paras. 1.14-1.15 and 3.9.1-3.9.16.
Paper 2B), IASB, April 2007, item #5, table
5
IFRIC Update, July 2007.
following para. 14.
6 IGC Q&A 137-13.
10 IFRIC Update, November 2016.
7
IASB Update, January 2013.
11 ASC 815-35-35-1 through 35-26 (formerly,
8 Information for Observers (February
2007
Statement 133 Implementation Issue
H8,
IASB meeting), Business Combinations II:
Foreign Currency Hedges: Measuring the
Reassessments (Agenda Paper 2B), IASB,
Amount of Ineffectiveness in a Net
February 2007, para. 25.
Investment Hedge).
4162 Chapter 49
12 IFRIC Update, March 2016.
19 IFRIC Update, January 2013.
13 ASC 815-35-35-1 to 35-26 (formerly, Statement
20 IASB Update, June 2018.
133 Implementation Issue H8, Foreign Currency
21 IFRIC Update, March 2018.
Hedges: Measuring the Amount of Ineffectiveness
22 IASB Update, May 2012.
in a Net Investment Hedge).
23 IASB Update, January 2013.
14 www.bbalibor.com/explained/definitions
24 For example: Request to allow hedge
(24 July 2013).
accounting to comply with either IAS 39 or
15 IASB Update, June 2018.
IFRS 9 while the macro hedging project is
16 IFRIC Update, March 2007.
developed, letter from EFRAG to the IASB,
17 IASB Update, January 2013.
22 March 2013.
18 IFRIC Update, January 2011.
25 IFRIC Update, January 2016.
4163
Chapter 50
Financial instruments:
Presentation and
disclosure
1 INTRODUCTION .......................................................................................... 4169
1.1
IAS 32 .................................................................................................................... 4169
1.2 IFRS 7 .................................................................................................................... 4169
2 SCOPE OF IFRS 7......................................................................................... 4170
2.1
Entities required to comply with IFRS 7 ........................................................ 4170
2.2
Financial instruments within the scope of IFRS 7 ....................................... 4170
2.3 Interim
reports .................................................................................................... 4170
3 STRUCTURING THE DISCLOSURES ............................................................. 4171
3.1
Level of detail ...................................................................................................... 4172
3.2 Materiality ............................................................................................................ 4172
3.3
Classes of financial instrument ........................................................................ 4173
4 SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR AN ENTITY’S
FINANCIAL POSITION AND PERFORMANCE ............................................... 4173
4.1
Accounting policies ............................................................................................ 4174
4.2 Income,
expenses,
gains and losses ................................................................ 4174
4.2.1
Gains and losses by measurement category .................................. 4174
4.2.2 Interest
income and expense ........................................................... 4175
4.2.3 Fee
income
and expense .................................................................. 4176
4.3
Hedge accounting ............................................................................................... 4176
4.3.1
The risk management strategy ......................................................... 4177
4.3.2
The amount, timing and uncertainty of future cash flows ......... 4178
4.3.3
The effects of hedge accounting on financial position and
performance ........................................................................................ 4179
4164 Chapter 50
4.3.4
Option to designate a credit exposure as measured at fair
value through profit or loss .............................................................. 4182
4.4
Statement of financial position ........................................................................ 4183
4.4.1
Categories of financial assets and financial liabilities ................. 4183
4.4.2
Financial liabilities designated at fair value through profit
or loss .................................................................................................... 4183
4.4.3
Financial assets designated as measured at fair value
through profit or loss ......................................................................... 4184
4.4.4
Investments in equity instruments designated at fair value
through other comprehensive income ........................................... 4185
4.4.5 Reclassification ................................................................................... 4186
4.4.6 Collateral .............................................................................................. 4186
4.4.7
Compoun
d financial instruments with multiple embedded
derivatives ............................................................................................ 4187
4.4.8 Defaults
and
breaches of loans payable ......................................... 4187
4.4.9
Interests in associates and joint ventures accounted for in
accordance with IFRS 9 .................................................................... 4187
4.5
Fair values ............................................................................................................ 4188
4.5.1
General disclosure requirements .................................................... 4188
4.5.2
Day 1 profits ......................................................................................... 4189
4.6
Business combinations ....................................................................................... 4191
4.6.1
Acquired receivables ......................................................................... 4191
4.6.2
Contingent consideration and indemnification assets ................ 4191
5 NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL
INSTRUMENTS............................................................................................. 4192
5.1
Qualitative disclosures ....................................................................................... 4194
5.2 Quantitative
disclosures .................................................................................... 4197
5.3 Credit
risk
.............................................................................................................
4197
5.3.1
Scope and objectives ......................................................................... 4198
5.3.2
Credit risk management practices ................................................... 4198
5.3.3 Quantitative
and
qualitative information about amounts
arising from expected credit losses ................................................ 4200
5.3.4
Credit risk exposure .......................................................................... 4205
5.3.5
Collateral and other credit enhancements obtained .................. 4208
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 825