Hedge accounting under IFRS 9 a closer look at the changes and challenges 4

Insert colour image

4
Table 1: Key differences between IAS 39 and the exposure draft
IAS 39 The exposure draft
Risk management Not necessarily linked to the objectives of hedge
accounting
Hedge accounting is expected to be more closely
aligned
Hedged items Several resLricLions; nonlnancial iLems can only be
hedged in their entirety or for foreign currency risk
Derivatives are not permitted as hedged items
Risk componenLs LhaL are separaLely idenLilable and
reliably measurable will be eligible, including those of
nonlnancial iLems
Layer components and combinations of derivatives
and non-derivatives will also be eligible
Hedging instruments Several restrictions apply to the types of hedging
instruments that can be used in hedge relationships
Some resLricLions will be relaxed; any lnancial
insLrumenL measured aL lair value Lhrouqh prolL or
loss will qualify
Written options and internal derivatives will continue to
be prohibited
Effectiveness assessment Onerous requirements to perform retrospective and
prospective testing
Bright line test of 80-125% effectiveness for a hedge to
remain highly effective
Changes to hedge relationship would result in
mandatory de-designation
Testing is required only on a prospective basis
No bright line tests
Changes to hedge relationship may result in
rebalancing of the hedge ratio rather than
de-designation
Ineffectiveness Measured on a retrospective basis and recognised in
prolL or loss
No change proposed
Groups and net positions Several restrictions for groups of gross positions, many
dillculLies in achievinq hedqe accounLinq
Layer components of gross positions permitted only
for forecast transactions
Groups of net positions not permitted
Items in gross positions must be individually eligible for
hedge accounting and be managed on that basis for
risk management
Layer components now permitted for forecast as well
as existing transactions, subject to some criteria
Groups of net positions permitted subject to certain
criteria
Fair value hedges Hedge of the exposure to changes in fair value of a
recognised asset or liability, or a previously unrecognised
lrm commiLmenL, Lo buy or sell aL a lxed price, or an
idenLiled porLion LhaL is aLLribuLable Lo a parLicular risk
and could allecL prolL or loss. Mechanics involve:
Hedqed iLem beinq ad|usLed Lo relecL Lhe ollseL
achieved by the hedge relationship
Changes in fair value of hedged item and hedging
insLrumenL beinq recorded in prolL or loss
No chanqe proposed Lo delniLion; Lhe mechanics
would chanqe as lollows:
LllecL ol hedqe accounLinq will be relecLed as a
separate balance sheet line item
Changes in fair value of both hedged item and hedging
instrument will be recorded in OCI, and any
inellecLiveness will be Lranslerred Lo prolL or loss
immediately
Cash low hedqes Hedqe ol Lhe exposure Lo variabiliLy in cash lows
attributable to a particular risk associated with a
recognised asset or liability, or a highly probable forecast
LransacLion, which could allecL prolL or loss
No change proposed
Hedges of net investments Foreign currency exposure arising between the
functional currencies of the foreign operation and the
parent is permitted as a hedged item
No change proposed