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IFRIC 16 — Hedges of a Net Investment in a Foreign Operation

References

  • IAS 21 The Effects of Changes in Foreign Exchange Rates
  • IAS 39 Financial Instruments: Recognition and Measurement

History

DateDevelopmentComments
19 July 2007 IFRIC D22 Hedges of a Net Investment in a Foreign Operation published Comment deadline 19 October 2007
3 July 2008 IFRIC 16 Hedges of a Net Investment in a Foreign Operation issued Effective for annual periods beginning on or after 1 October 2008
30 January 2009 Exposure Draft ED/2009/1 Post-implementation Revisions to IFRIC Interpretations (Proposed amendments to IFRIC 9 and IFRIC 16) published Comment deadline 2 March 2009
16 April 2009 Amended by Improvements to IFRSs (entity that can hold hedging instruments) Effective for annual periods beginning on or after 1 July 2009

Summary of IFRIC 16

IFRIC 16 clarifies three main issues:

Whether risk arises from (a) the foreign currency exposure to the functional currencies of the foreign operation and the parent entity, or from (b) the foreign currency exposure to the functional currency of the foreign operation and the presentation currency of the parent entity's consolidated financial statements.

IFRIC 16 concludes that the presentation currency does not create an exposure to which an entity may apply hedge accounting. Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation.

Which entity within a group can hold a hedging instrument in a hedge of a net investment in a foreign operation and in particular whether the parent entity holding the net investment in a foreign operation must also hold the hedging instrument.

IFRIC 16 concludes that the hedging instrument(s) may be held by any entity or entities within the group.

How an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item when the entity disposes of the investment.

IFRIC 16 concludes that while IAS 39 must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21 must be applied in respect of the hedged item.

Effective date

IFRIC 16 is effective for annual periods beginning on or after 1 October 2008. An entity may choose to apply IFRIC 16 retrospectively or prospectively. Earlier application is permitted.

Press release

Click for the IASB Press Release (PDF 59k).

IAS Plus Newsletter

Click for the IAS Plus Newsletter on IFRIC 16 (PDF 122k).

Amendment to IFRIC 16 proposed at January 2009 IASB meeting

At its January 2009 Meeting, the Board discussed an issue that had been submitted by a constituent subsequent to the publication of IFRIC 16. The staff had satisfied itself (in consultation with Board members and an IFRIC member) that the constituent's issue was valid and had not been contemplated by the IFRIC when IFRIC 16 was being developed. The concern raised was that in some circumstances, while the total amounts of foreign exchange differences are indeed the same with and without hedge accounting, the split between the amounts included in profit or loss and foreign currency translation reserve would be different. Without hedge accounting, the foreign exchange difference arising from the hedging instrument would be included in profit or loss while the difference arising from the net investment would be included in the foreign currency translation reserve.

The Board agreed to amend IFRIC 16 paragraph 14 by deleting a parenthetical comment: '(except the foreign operation that itself is being hedged)'.

So this amendment can be in place in time to be used for 30 June 2009 interim financial reporting, the Board agreed that it should issue an exposure draft of the proposals for a 30-day comment period (the minimum permitted by the IASB's Due Process Handbook). It was acknowledged that it was unlikely that any amendment could be finalised in time to accommodate first quarter 2009 interim reporting.

Exposure Draft of Amendment to IFRIC 16 – Designation of a hedging instrument in a hedge of a net investment in a foreign operation

Based on discussions at its January 2009 Meeting, on 30 January 2009 the Board issued Exposure Draft ED/2009/1 proposing to allow entities to designate as a hedging instrument in a hedge of a net investment in a foreign operation an instrument that is held by the foreign operation that is being hedged. The ED proposes to amend IFRIC 16 paragraph 14 by deleting a parenthetical comment: '(except the foreign operation that itself is being hedged)'. The proposed effective date is annual periods beginning on or after 1 October 2008. Comment deadline is 2 March 2009. Click for More Information.

April 2009: IFRIC 16 amended

On 16 April 2009 the IASB amended IFRIC 16 to allow entities to designate as a hedging instrument in a net investment in a foreign operation an instrument that is held by the foreign operation that is being hedged. Effective date is 1 July 2009. The amendment was part of the IASB's annual improvements for 2009. Click for IASB Press Release (PDF 45k).