Financial Instruments: Macro Hedging

Date recorded:

Hedge Effectiveness

The Board considered the following issues:

  • Should IAS 39's effectiveness tests apply to a macro hedge?
  • How should IAS 39's effectiveness tests be applied to a macro hedge?
  • Should the Board change or clarify IAS 39's effectiveness tests?

In respect of applying the effectiveness tests the staff recommended:

  • IAS 39's effectiveness requirements should apply to a macro hedge. That is, the proposals in the ED are not an alternative to, and do not overrule, IAS 39's effectiveness tests.
  • The final standard should clarify that if the entity's strategy is to 'rebalance' a hedge periodically by altering the amount of the hedging derivative to reflect changes in the hedged position, the entity, when assessing if the hedge is expected to be highly effective, needs to demonstrate an expectation that the hedge will be highly effective only for the period to when the hedge is next adjusted.
  • The final standard should clarify that the retrospective effectiveness test should be assessed for all time buckets in aggregate and not individually for each time bucket.
  • The words 'almost fully offset' should be removed from IAS 39's prospective effectiveness test and be replaced by a requirement that the hedge is expected to be highly effective (the same words as are used in US GAAP). Also, the final Standard should clarify that such an expectation may demonstrated in a number of ways, including a comparison of past changes in the fair value or cash flows of the hedging instrument and those of the hedged item, or by demonstrating a high statistical correlation.
  • The final standard should clarify that when the hedged item is designated as a portion, ineffectiveness should be measured by looking at only changes in that designated portion. The Board should also consider referring other issues about hedging a portion to the IFRIC or addressing them in a separate amendment to IAS 39.
  • The final standard should clarify that an entity cannot deliberately hedge less than 100% of the exposure on an item and designate the hedge as a hedge of 100% of the exposure. Rather, if an entity hedges less than 100% of the exposure on an item, such as 85%, it shall designate the hedged item as being 85% of the exposure and shall measure ineffectiveness based on the change in that designated 85% exposure.

The Board agreed that the prospective requirements would apply to these hedges. They clarified that this would not prevent hedging from being applied and a policy of adjusting hedges could be considered in order to achieve the prospective requirements. They further noted that these adjustments would require an ineffectiveness determination for the retrospective test. It was noted that even if the retrospective test was failed, prospective designation for remaining periods could occur provided suitable changes were made to address the reasons for the retrospective test failing.

The Board agreed to amend the wording in the application guidance in respect of prospective hedge determination. This would involve deleting the words 'almost fully offset', allowing various techniques to determine this and stating that deliberate underhedging is not permitted.

The Board further agreed to clarify that portions can be designated and that hedge effectiveness will be determined based on the portion designated. It was agreed to clarify that in designating portions in a fair value hedge, the fair value of the hedge components is determined at the time of designation.


The Board discussed how entities should amortise the separate balance sheet line item in either assets or liabilities that arise as a result of using fair value hedge accounting for a portfolio hedge of interest rate risk. The line item contains the change in the fair value of the hedged item.

The staff proposed that:

  • The proposal in the ED that 'amounts included in these line items shall be removed from the balance sheet when the assets or liabilities to which they relate are derecognised' be retained.
  • The amortisation of the line item using a systematic basis that is consistently applied throughout the period of the hedge be allowed.

The staff presented an example using a constant effective yield but noted this may be extremely difficult in practice. They therefore did not propose requiring this method.

The Board agreed with the staff's proposals but concluded that the standard should state that the principle is a constant effective yield amortisation. The standard should acknowledge that this may not be possible and state that a straight-line amortisation is the minimum.

It was noted that where the underlying hedged item is derecognised, no further amortisation in respect of that item would be necessary.


The staff recommended that:

  • The final standard should contain guidance on how to transition from cash flow hedge accounting under the original IAS 39 and fair value hedge accounting. More specifically, the Application Guidance should confirm that an entity wishing to apply fair value hedge accounting to a portfolio that has been accounted for using cash flow hedge accounting should apply IAS 39.101(d) to discontinue cash flow hedge accounting and should designate a new hedge in accordance with the proposed amendments for future accounting periods.
  • The final standard should not permit a fair value hedge of a portfolio of interest rate risk to be designated retrospectively, through a one-time election either on the date the amendments become effective (ie before 1 January 2005), or, alternatively, before a predetermined period expires (such as before the start of the accounting period in which the entity first applies the revised IAS 39).
  • The final standard should not give explicit guidance for entities that wish to apply fair value hedge accounting for their portfolio hedges where possible, but do not meet the conditions to do so for all time buckets. Rather the usual requirements in IAS 39 for discontinuing fair value (or cash flow) hedge accounting and for re-designating a hedge should apply.
  • Entities should adopt the amendments at the same time as they adopt the revised IAS 39.

The Board agreed with the staff proposals.

Other Issues

The Board considered various other issues on an exception basis.

No Board members indicated that they intended dissenting from the standard.

Correction list for hyphenation

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