IFRS 9 — Hedge accounting with load following swaps

Date recorded:


The Committee received a request in relation to how to apply the term “highly probable” as it is used in IAS 39 Financial Instruments: Recognition and Measurement (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. 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.

Comment letter analysis and staff analysis

Five comment letters received and all agree with the Committee's decision not to add the matter to its standard-setting agenda but certain letters have identified another question related to how uncertainty over timing and magnitude would affect the highly probable assessment applying IAS 39 and IFRS 9.

The staff analyse that paragraph F.3.7 of the Implementation Guidance accompanying IAS 39 provides further guidance on how to interpret ‘highly probable’. When assessing the likelihood that a transaction will occur, an entity considers uncertainty over both the magnitude and timing of a forecast transaction. In addition, because timing also affects the determination of probability, paragraphs F.3.7 and F.3.11 of the Implementation Guidance accompanying IAS 39 states that an entity considers the length of time until a forecast transaction is projected to occur.

The staff also highlight that a specific contractual term of a specific hedging instrument (e.g. a derivative notional amount that varies depending on the outcome of the hedged item) does not affect the assessment of whether a forecast transaction is highly probable. As stated in IFRS 9:6.3.3, the highly probable requirement is applicable to forecast transactions designated as hedged items. Therefore, the staff is of the view that the specific characteristics of a hedging instrument does not affect the assessment of whether the forecast transaction is highly probable. The staff note that this specifically addresses the assessment of whether a forecast transaction is highly probable; it does not address other hedge accounting requirements, such as the assessment of hedge effectiveness.

Staff recommendation

The staff recommend updating the tentative agenda decision as published in IFRIC Update in March 2018 that includes the context of paragraph F.3.7 of the Implementation Guidance accompanying IAS 39 and requirements in IFRS 9:6.3.3, which addresses a broader matter than that originally published.


A few Committee members had expressed their views that the staff paper helped to answer the questions asked. A Committee member pointed out that it is appropriate to mention that the consideration includes the magnitude of a forecast transaction and that this is critical to assess if the forecast transaction is highly probable. At the same time, some Committee members were concerned about the additional paragraph which quoted the relevant literature in IAS 39 which is the old standard. The Committee recommended to improve the wording to make clear that the guidance in IAS 39 was carried forward to IFRS 9.


The Committee decided not to take this matter onto its agenda and to issue a tentative Agenda Decision.


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