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IFRS 9 — Hedge accounting with load following swaps

Date recorded:

IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments - Hedge accounting with load following swaps (Agenda Paper 9)


The Committee received a request in relation to how to apply the term “highly probable” as it is used in IAS 39.88 and IFRS, to assess whether a hedging relationship qualifies for hedge accounting. 

The submitter describes how a Load Following Swap contract is used as a hedge instrument in power generation.  A Load Following Swap is a contract with a variable notional, typically a function of actual hedged volumes. The example describes how a solar energy farm could sell all its energy produced on the national energy market at the spot rate while also, separately, entering into a 15-year Load Following Swap with an independent third party. Under the Load Following Swap the variable cash flows from the energy sold at spot rates is swapped into fixed cash flows. The nature of the Load Following Swap is such that the notional amount on which the settlements will be based is the actual quantity of electricity sold. Economically, this arrangement results in a perfect hedge of the volumes sold for changes in the spot price as there will never be a mismatch in volumes between the actual volumes of electricity sold into the grid and the notional of the Load Following Swap.

The submitter asked how the ‘highly probable’ requirement in IAS 39 and IFRS 9 should be applied in the fact pattern described. They think it is unclear whether an entity has to identify and document the time period during which the forecast transaction is expected to occur within a reasonably specific and generally narrow range of time at the inception of the hedge relationship or whether an entity is only required to demonstrate that the forecast transaction is highly probable to occur and therefore does not require the precise timing, cash flows or volumes to be specified.

The submitter also asks, when assessing hedge effectiveness (under IAS 39) or measuring hedge effectiveness (under IAS 39 or IFRS 9), whether the hedged item has to be fixed (in volume terms) at inception of the hedging relationship or if the underlying volumes can vary based on expected volumes from period to period. The submitter says it is not clear whether the assessment and measurement of hedge effectiveness must be based on a fixed (in volume terms) hedged item determined and documented at the date of hedge designation or whether the underlying volumes can vary based on expected volumes from period to period.

The submitter also asked whether the answer to either question differs depending on whether an entity applies the hedging accounting requirements of IAS 39 or of IFRS 9. They note that IAS 39 and IFRS 9 have different objectives and guidance and ask whether this could lead to a different answer for the same fact pattern under the two standards.

Staff analysis

The staff asked standard setters, securities regulators and the large accounting networks whether the use of Load Following Swaps in hedging is common and if so in which particular sectors, and to what they had observed diversity in financial reporting. The staff received 12 responses and those respondents stated that the issue is not widespread since only a relatively small number of entities have designated these instruments in hedge accounting relationships.

Staff recommendation

The staff are recommending that the Committee not add the item to its agenda, on the grounds that there is insufficient evidence that the matter has widespread effect or is expected to have a material effect on those affected.


The discussion on the Agenda Paper 8 was clearly also relevant to this matter, because the same basis was used to justify the absence of analysis and the recommendation not to add the item to its agenda.  

Some members thought these arrangements were not prevalent enough to deal with and it could get complex quickly.  However, several members thought that the issue should be analysed. Although the fact pattern submitted is very narrow, deal contingent derivatives are relatively widespread. There is general acceptance that you do not meet the hedge accounting requirements when applying IAS 39 but some members are seeing diversity emerging with IFRS 9. Furthermore, a member noted that this is an emerging issue and the Committee should take into consideration that some issues could become more widespread. This is one such issue and it would not be desirable if the Committee had the chance to curb divergence but did not take it. One member warned against using the term “disruptive” both in the tentative agenda decision and in the public discussions, because it implied that no issues could be addressed.

One member commented that without technical analysis it is difficult to make a decision.

Several members thought a tentative agenda decision might draw information from a broader population and potentially identify a broader issue.

Before taking a vote, it was agreed that the words “or is expected to have a material effect on those affected” should be removed from the tentative decision, with one member noting that such transactions were likely to be material to those affected.  

The Committee decided (9:5) to issue a tentative decision not to add the issue to its agenda.

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