IFRIC D22 — Sweep issues and Draft Interpretation
The IFRIC discussed a revised draft of the Interpretation Hedges of a Net Investment in a Foreign Operation reflecting the decisions made at previous meetings.
Consideration of outstanding issues
The main changes made to D22 since it was exposed for comment are as follows:
- Clarification that the carrying amount of the net assets of a foreign operation that may be hedged in the consolidated financial statements of a parent depends on whether any lower level parent of the foreign operation has hedged all or part of the net assets of that foreign operation.
- Clarification that the assessment of hedge effectiveness is not affected by the method of consolidation (direct or step-by-step).
- Additional guidance on what amounts should be reclassified from equity to profit or loss as reclassification adjustments on disposal of the foreign operation. The revised draft clarifies that the consolidation method (direct or step-by-step) may affect the amount included in the foreign currency translation reserve (FCTR) in respect of the individual foreign operations, in particular, "(w)hen the hedging instrument is not held by the parent entity hedging its net investment, the use of the step-by-step method of consolidation may result in the reclassification to profit or loss of an amount different from that used to determine hedge effectiveness". In this case an entity may (but is not required to) eliminate this difference "by retrospectively determining the amount relating to that foreign operation using the direct method of consolidation".
- Inclusion of Application Guidance that replaces all Illustrative Examples in D22.
- Additional transitional provisions stating that any existing hedge relationships that do not meet the conditions for hedge accounting in the Interpretation should be discontinued prospectively in accordance with the requirements of IAS 39 Financial Instruments: Recognition and Measurement.
One IFRIC member questioned whether some language in the draft Interpretation may undermine the IFRIC consensus that the method of consolidation has no impact on hedge effectiveness and where the hedge instrument can be held. The IFRIC decided to remove this language; in particular to delete the last sentence of paragraph 12 of the draft Interpretation stating "(h)owever, different methods of consolidation may affect the foreign currency risk that can be hedged merely due to the mechanics of the consolidation methods (see Appendix AG4)".
The IFRIC also decided to clarify the application guidance relating to paragraphs 11 and 13 of the draft Interpretation. Among other things paragraphs 11 and 13 state that "the carrying amounts of the net assets of a foreign operation that may be designed as the hedged item in the consolidated financial statements of a parent depends on whether any lower level parent of the foreign operation has applied hedge accounting for all or part of the net assets of that foreign operation" and that "(a)n exposure to foreign currency risk arising from a net investment in a foreign operation may qualify for hedge accounting only once in the consolidated financial statements". Some IFRIC members noted that the application guidance in AG7 (third bullet) and AG9 relating to is difficult to understand and may be misleading. The staff was asked to clarify the application guidance to better reflect the consensus.
Some IFRIC members thought the question which amount is to be reclassified from equity to profit or loss as a reclassification adjustment on disposal of the foreign operation is an important practical issue and suggested that an example be included. One IFRIC member offered to provide such an example to the staff. The IFRIC decided that this example should be examined by the staff and included as an illustrative example if it is considered helpful.
The IFRIC reviewed the triggers in the Due Process Handbook for the IFRIC that would require re-exposure and agreed that the changes made to the Interpretation since exposure did not trigger re-exposure.
The IFRIC agreed to recommend to the IASB that the Interpretation be effective for annual financial statements for periods beginning on or after 1 October 2008. The Interpretation should be applied prospectively with retrospective application in accordance with IAS 8 Accounting Policies, Changes in Estimates and Errors being permitted.
Approval of the Interpretation
The Chairman asked whether any IFRIC member would dissent from issuing the Interpretation. No members indicated that they would dissent. The Interpretation was approved unanimously.
The IFRIC will complete its review of the final text in time for the Interpretation to be sent to the Board for approval by written ballot at the June IASB meeting. If approved, the Interpretation would be issued before the end of June 2008.