Need to know — Hedge accounting reforms: A closer reflection of risk management

Published on: 19 Nov, 2013

This publication from Deloitte discusses the new hedge accounting requirements which form part of IFRS 9 'Financial Instruments' .

Entities that apply IFRS 9 will have an accounting policy choice under the standard as to whether to apply the hedge accounting model in IAS 39 'Financial Instruments: Recognition and Measurement' or IFRS 9. The IASB will revisit this accounting policy choice when it finalises its work on the macro hedging project.

The hedge accounting requirements under IFRS 9 were introduced in response to criticism of IAS 39 which was often viewed as too stringent and not capable of reflecting risk management activities.

The three types of hedge accounting remain: cash flow; fair value and net investment hedges. However, there have been significant changes to the types of transactions eligible for hedge accounting, specifically a broadening of the risks eligible for hedge accounting of non‑financial items.

The effectiveness test has been overhauled with the 80-125 per cent quantitative test replaced with the principle that an 'economic relationship' must exist between the hedged item and hedging instrument.  Retrospective assessment of hedge effectiveness is no longer required. 

Changes in the way forward contracts and derivative options are accounted for when they are in a hedge accounting relationship will reduce profit or loss volatility when compared with IAS 39 and therefore will be attractive for some entities.

The flexibility of the new accounting requirements is counter‑balanced by enhanced disclosure requirements about an entity’s risk management activities.

The accompanying Basis for Conclusions is lengthy as it includes extensive explanations of the differences between the new guidance and IAS 39.

The effective date of IFRS 9 has been removed pending the completion of IFRS 9 with a new impairment model and any limited amendments to the classification and measurement requirements (previously 1 January 2015).  However, early application is still permitted subject to EU endorsement.


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