IFRIC D22 — Preliminary discussion of comprehensive example

Date recorded:

At the January 2008 IFRIC meeting, the IFRIC discussed the comments received on its Draft Interpretation D22 Hedges of a Net Investment in a Foreign Operation. As a result of the deliberations, the staff was asked to provide a comprehensive example to confirm some of the principles underlying the draft Interpretation.

The principles the staff tried to demonstrate were:

  • The same risk can be hedged only once in the group
  • The amount of net investment to be hedged cannot be duplicated
  • A parent entity can hedge a net investment it holds indirectly
  • Where the hedging instrument is held has no effect on hedge effectiveness
  • The consolidation method (direct vs. indirect) does not affect hedge effectiveness
  • The nature of the hedging instrument (cash instrument or derivative) has no effect on hedge effectiveness

The staff presented various scenarios of net investment hedges involving cash instruments or derivatives to illustrate the principles. The examples contained the necessary calculations and journal entries in detail.

One IFRIC member noted that the examples are meant to prove the principles, as the spreadsheets were set up using those principles.

The IFRIC discussed some points using the spreadsheets in depth.

Method of consolidation

Some IFRIC members were particularly concerned with the assumption that the direct method of consolidation is the correct one and other methods must be adjusted to result in the same figures as the direct method. The chairman told IFRIC members that the Interpretation does not prescribe any method of consolidation but reflects the standards as currently applicable. The staff noted that the question does not deal with the consolidation procedure itself but with effectiveness testing.

Overhedging and hedging the same risk twice

It was also confirmed that an entity cannot hedge the same risk twice, and some designations/designated amounts would not be valid as they would result in overhedging. One member noted that this would normally not occur in practice as it would also make no sense to overhedge from an economic perspective.

Location of the hedging instrument

Some IFRIC members highlighted that the method of consolidation could affect the amounts recognised if the hedging instrument is not held within the (sub-)group containing the hedged item (that is, the net investment).


The discussion then switched to the issue of recycling once the net investment or the entity containing the hedging instrument is disposed of. It was noted that this could lead to practical implications and complications, as the amounts in the respective foreign currency translation reserve must be identifiable to allow the correct timing of recycling that results from assuming IAS 39 overrides IAS 21 when it comes to hedge accounting. Some members expressed concerns over the theoretical foundation and the practical application of this approach. The chairman noted that it would not be in the scope of this Interpretation to provide guidance on this issue as this would be a general hedge accounting issue. Some members still did not seem to be convinced.

The IFRIC continued its debate on the issues of the method of consolidation and recycling. While there seemed to be agreement that the Interpretation should not prescribe the method of consolidation, some members asked the staff to include words as a caveat to remind entities that they would have to track the amounts in the foreign currency translation reserve relating to hedge accounting, which could be challenging in large and complex group structures. One member also cited possible transitional issues. Another IFRIC member believed implementing the IFRIC approach correctly could be a huge task for some entities.

The IFRIC also discussed which examples should go into the final Interpretation as illustrative examples, but did not make a final decision. The staff was also asked to align the example that currently is contained in the draft Interpretation.

Other issues raised by commentators

The staff also asked the Board to confirm its preliminary conclusions on certain issues raised by commentators to the draft Interpretation.

Could a parent entity apply hedge accounting in its separate financial statements? How should the hedged amounts be accounted for?

Yes, but that would be a different type of hedge (for example, a fair value hedge). No further clarification is required.

The IFRIC agreed.

How should an entity account for the ineffectiveness resulting from a decrease in a net investment value during the term of hedge?

All ineffectiveness will be recognised in profit or loss. No exception exists for net investment hedges. Such an ex post overhedge would result in ineffectiveness. No further clarification is required.

The IFRIC agreed.

Should the transitional requirements be clarified?

Some commentators asked for clarification on the transitional provision with regard to applying the Interpretation prospectively. The staff proposed to amend the transitional paragraph as follows:

"...when first applying the Interpretation. If an entity had designated a transaction as a hedge of a net investment but the hedge does not meet the conditions for hedge accounting in this Interpretation, the entity shall apply IAS 39 to discontinue prospectively that hedge accounting."

The IFRIC agreed.

Is an intra-group loan defined by IAS 21 The Effects of Changes in Foreign Exchange Rates paragraph 15 in the scope of this interpretation? Could such an intra-group loan be a part of the net investment?

Yes, this is obvious from the Standard. No further clarification is required.

The IFRIC agreed, however one member questioned if this really was the question the commentator asked as it was so obvious.

Does a hedge relationship designated at a lower group level require hedge documentation also at the higher group levels in order for the lower level hedge to qualify for hedge accounting at any higher level?

The IFRIC had a lengthy discussion on this issue, notably if an entity would be required at a higher level to 'unhedge', that is, explicitly state that it does not want to continue hedge accounting coming from a lower level in the group.

The IFRIC finally agreed that this is out of the scope of this interpretation as it would be general guidance on how to document hedging relationships. Accordingly, the IFRIC agreed with the staff recommendation not to provide further clarification.

Should the interpretation include the reason the hedging instruments may not be held by the foreign operation that is being hedged?

No, as this is would allow the net investment to hedge itself as the instrument is part of the net investment.

The IFRIC agreed.

Then the staff asked the IFRIC whether it agreed with the staff view that the following questions are addressed by the examples presented. One member expressed concerns as the examples would not be contained in the final Interpretation.

  • How should an entity account for various fact patterns such as:
    • a foreign operation is held jointly by two intermediate parents with different currencies
    • a combination of instruments is held by one or several entities within the group to hedge one exposure
    • Parent A holds subsidiaries B (100%) and C (70%) and B holds 30% of C, could B's 30% interest qualify as part of the hedged item in A's consolidated financial statements?
  • Should the interpretation indicate that the location of hedging instrument should have no effect on the amounts actually deferred in equity as an effective hedge?
  • Should the interpretation further clarify possible differences in the amounts of the foreign currency translation reserve caused by the method of the consolidation?

The IFRIC agreed not to address these issues in the final Interpretation.

Way forward

The staff was asked to amend the draft Interpretation in the light of this meeting's discussions and integrate selected examples. The staff will return at the May IFRIC meeting with a new draft of the Interpretation for clearance by IFRIC.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.