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IAS 39 — Hedging using more than one derivative as the hedging instrument

Date recorded:

In March 2009 the IFRIC received a request for guidance on how to apply IAS 39 Guidance on Implementing F.2.1 Whether a derivative can be designated as a hedged item (IAS 39 IG F.2.1.) when an entity issues fixed interest rate foreign currency debt and then swaps it into floating interest rate local currency debt using a cross currency interest rate swap (CCIRS). The entity also enters into a local currency pay-fixed, receive-variable interest rate swap (IRS), which has a shorter duration than that of the cross currency interest rate swap.

In the staff's view, the real question in the case is whether the combination of the two derivatives (i.e. the CCIRS and the IRS) as the hedging instrument satisfy the hedge effectiveness test (as required by IAS 39 including paragraph 88) for one hedged item (eg the US debt) for the risks (US$/AUD FX risk and fixed/float interest risk). In the staff's view:

  1. the CCIRS and the IRS in combination are eligible for joint designation as the hedging instrument in a hedging relationship with the fixed rate US$ debt as the hedged item;
  2. the challenge of such a designation is the hedge effectiveness testing (as pointed out by supporters of View B - see paragraph 9 above);
  3. if the prospective hedge effectiveness test (paragraphs 88(b) and AG105(a) of IAS 39) fails because of the challenge associated with this hedging relationship then the hedging relationship would not qualify for hedge accounting from the outset, ie commencement of the initial IRS covering the first five years (notwithstanding the eligibility for designation).

In the staff's opinion, IAS 39 provides clear guidance for the cases of combining the two derivatives as a single hedging instrument and its hedge effectiveness test (including the submitter's case). Therefore, in the staff's view, development of an interpretation would result in providing implementation guidance on paragraphs 77 and 88, rather than an interpretation.

One IFRIC member asked if there was really diversity in practice. Another responded by saying yes there was. The staff were requested to remove the wording from the agenda decision which stated that the IFRIC had not identified any significant diversity in practice.

The IFRIC agreed with the staff recommendation not to add the issue to IFRIC's agenda, subject to the drafting change noted above.

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