Amendment to IAS 39: Exposures Qualifying for Hedge Accounting

Date recorded:

At the April 2008 meeting the Board discussed how to proceed with this project. The Board decided to make limited amendments to IAS 39 addressing two issues:

  • the hedging of inflation risk in particular situations, and
  • the designation of a purchased option in its entirety as a hedging instrument for risk in an item that contains no optionality, in such a way that no effectiveness results.


Designation of inflation risk in particular situations

The issue originally raised to the IASB was whether it was possible under IAS 39 to designate as a hedged item the inflation risk associated with a fixed rate financial liability.

The Board discussed this issue as part of the deliberations that resulted in the publication of the ED of amendments to IAS 39. The ED clarifies that fixed rate debt cannot be fair-value hedged for inflation risk, yet floating rate debt can, but only if the contractual floating rate cash flows of that recognised debt instrument are linked to changes in inflation. Inflation risk was not specified as an eligible risk in paragraph 80Y of the ED. However, if inflation (a) was a contractually specified cash flow and (b) the remaining cash flows of the instrument would not be a residual amount, paragraph 80Y(e) of the ED permitted designation of the inflation component.

At this meeting the Board members confirmed their decision as they believed this reflected its original intentions that only risks and cash flows that were separately identifiable and measurable should be eligible for designation. The Board also believed that this decision reflected existing practice and this was largely confirmed by respondents to the ED. Paragraph 80Y will be moved to the application guidance of IAS 39.


Designation of purchased option as hedging instrument

The ED also provides clarity on a previous IFRIC discussion on cash flow hedge effectiveness using options. If an entity hedges a non-optional exposure (for example, floating rate interest payments on issued floating rate debt) with an option (for example, by buying an interest rate cap), the entity cannot claim that the debt has optionality that is equivalent to that in the option and thereby defer all the fair value movements of the option in equity under a cash flow hedge.

The decision of the Board in developing the ED (paragraph AG99E) was consistent with the view of the IFRIC. Paragraph AG99E states that: 'In designating as a hedged item a portion of a financial instrument, an entity cannot specify as the hedged item a cash flow that does not exist in the financial instrument as a whole. For example, in designating a one-sided risk (such as the decrease in the fair value of a financial asset) as a hedged portion, an entity cannot include any cash flows that are imputed or inferred in the designated hedged portion (for example, inferring the cash flows arising from the time value of a hypothetical written option in a non-derivative financial asset).'

The Board decided to retain the approach in the ED as they believed that this decision reflected their original intentions. However, the Board acknowledged that diversity in practice exists and that paragraph AG99E may result in a change in practice for some entities.


Effective date on transition requirements for the proposed amendments

The ED proposed retrospective application. The Board believed that restating comparative information on first-time application of this proposed amendment should not entail significant cost or effort because the requirement in IAS 39 to document hedging relationships should mean that the information required to make any restatement is readily available. If an entity has previously deferred both the time value and intrinsic value of a purchased option and the amendment would disqualify such a designation, the entity would be required to restate to the position had hedge accounting not been applied at all. In such a case, an entity cannot retrospectively present the effects of an alternative hedge designation that was not actually applied in practice. This decision reflects the principle that hedge accounting can only be undertaken if the designation and documentation are done at inception of the hedge.

Regarding the proposed effective date, the staff proposed that the amendments should be applied for annual periods beginning on or after 1 January 2009, with earlier application permitted. A few Board members raised some concerns about whether the proposed effective date leaves enough time for the preparers to adopt the proposed amendments. The proposed effective date was approved by the affirmative vote of 11 Board members.

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