This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

IFRS 9 — Determining hedge effectiveness for net investment hedges

Date recorded:

The IFRS Interpretations Committee has received a request to clarify how to determine hedge effectiveness for hedges of a net investment in a foreign operation (‘net investment hedges’).

The submitter noted that IFRS 9 does not provide specific guidance for net investment hedges. Instead, the Standard states that they should be accounted for similarly to cash flow hedges and, in addition, the net investment hedge guidance in IFRS 9 cross-references to the accounting guidance for cash flow hedges including the ‘lower of’ test to measure effectiveness for hedging instruments.

The submitter finds it unclear whether the ‘lower of’ test also applies to the accounting for net investment hedges.

Staff recommendation

The staff contacted several constituents, of which a majority noted that IFRS 9 hedge accounting rules have not yet been adopted by most entities. Under the current IAS 39 practice, application of the ‘lower of’ test to net investment hedges was the approach most commonly observed. The respondents were not aware of any significant diversity in practice.

In addition, the staff analysed that the term ‘similarly’ in IFRS 9 should be understood to also extend to the application of the requirements of the ‘lower of’ test when accounting for net investment hedges, because the mechanics and underlying rationale of those requirements are closely aligned to the requirements and principles of IAS 21.

Based on the results of the outreach and the staff’s analysis, the staff recommend that the Interpretations Committee should not take this issue onto its agenda.

Committee discussion and decision

There was general support amongst Committee members to follow the staff recommendation as they had also not observed any significant diversity in practice. They confirmed that applying the ‘lower of’ test to net investment hedges was the predominant accounting.

However, some Committee members suggested amendments to the proposed tentative agenda decision. Several members struggled with the reasoning of aligning the hedge accounting requirements for net investment hedges with IAS 21. They argued that IAS 39 and IFRS 9 were the only Standards that dealt with hedge accounting.

The reference to IAS 39 in the proposed tentative agenda decision was challenged by one Committee member as, in his view, the guidance in IFRS 9 was sufficient. However, the other Committee members did not see an issue with this reference when the Chairman called for a formal vote on that reference.

Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.