IAS 21 — Hedging a net investment in a foreign operation

Date recorded:

The IFRIC discussed some 'sweep issues' related to a proposed Draft Interpretation on the accounting for a hedge of a net investment in a foreign operation.

Translation to a presentation currency

After considerable debate, the IFRIC agreed that IAS 39 Implementation Guidance issue F2.14 is applicable to the hedge of a net investment, and there is no requirement to use internal hedging instruments. In other words, the translation gain or loss can be used as part of the hedging instrument.

This approach would permit an entity to hold a hedging instrument anywhere within the consolidated group. However to obtain a qualifying instrument that would be effective both prospectively and retrospectively, the amounts included in the foreign currency translation reserve must be considered when testing effectiveness. If the foreign currency translation reserve is not included in the effectiveness tests the instrument may not be deemed eligible.

What exposure arises from the net investment?

The IFRIC agreed that an entity can hedge up to the full extent of its carrying amount in a net investment regardless of whether that net investment has investments in other foreign operations, because IAS 39 Financial Instruments: Recognition and Measurement does not require a risk reduction notion when using hedge accounting.

Effective date and transition

The IFRIC agreed that the Draft Interpretation should propose prospective application of the [draft] Interpretation. IFRIC members noted that it was probably impracticable to require retrospective application given the documentation requirements for hedge accounting.


The IFRIC Chairman asked whether, based on the provisional Draft Interpretation and the discussions today, any IFRIC members would not support the Draft Interpretation. None of the IFRIC members indicated a dissent. However, some IFRIC members wanted to see the next revision of the Draft Interpretation before making a definitive determination about whether further discussion by the IFRIC is necessary.

Next steps

The staff will present a revised Draft Interpretation to the IFRIC as soon as possible, with the intention that it will be passed to the IASB for negative clearance as provided in the IFRIC's Due Process Handbook. Provided that the IASB does not object to its publication, a Draft Interpretation should be published by July 2007.

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