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IFRS 9 — Fair value hedge of foreign currency risk on non-financial assets

Date recorded:


The Committee received submissions about whether foreign currency risk can be a separately identifiable and reliably measurable risk component of a non-financial asset held for consumption (for example, property, plant and equipment and inventory denominated in a foreign currency) that an entity can designate as the hedged item in a fair value hedge accounting relationship. One submitter also points out that a similar question can be applied to lease liabilities denominated in a foreign currency.

Staff analysis

The staff analyse that in such cases, an entity is exposed to foreign currency risk because the fair value of the non-financial asset could change in the market participants’ perspective and the change in fair value could affect profit or loss through translation of the fair value into an entity's functional currency. This would be the case when the fair value of a non-financial asset is determined only in a foreign currency. The staff further analyse that IAS 39 and IFRS 9 had allowed designation of non-financial items as hedged items only for foreign currency risks, or in their entirety for all risks. Accordingly, the staff view that foreign currency risk can be a separately identifiable and reliably measurable risk component of a non-financial asset, based on an assessment within the context of the particular market structure and other relevant facts and circumstances.

Next, the staff analyse the qualifying criteria for hedge accounting, one of which is at the inception of the hedging relationship, the formal designation and documentation of the hedging relationship and entity's risk management objective and strategy for undertaking the hedge. Provided that the risk management objective is about risk management activities rather than simply translation of foreign currency in the financial statements, the staff expect an entity would manage and hedge exposures to changes in fair value of non-financial assets held for consumption only in very limited circumstances.

The staff also highlight that all other requirements in IFRS 9, including the designation of a hedge and hedge effectiveness, shall also be carefully considered in determining whether an entity can apply hedge accounting.

Staff recommendation

The staff recommended that the that a tentative agenda decision be published stating that the Committee concluded that the requirements in IFRS 9 provide an adequate basis for an entity to conclude on whether foreign currency risk can be a separately identifiable and reliably measurable risk component of a non-financial asset held for consumption that an entity can designate as the hedged item in a fair value hedge accounting relationship.


Most of the Committee members agreed with the staff analysis (except for the 'accounting requirements' detailed below). One Committee member expressed his concern about the inconsistencies of the conclusion in the tentative agenda decision with the implementation guidance (IAS 39:IG F.6.5) which states that fair value hedge accounting cannot be applied for a non-monetary asset carried at cost. He asked the staff whether this IG of IAS 39 is still applicable. The staff responded that IAS 39 IG were developed in the context of IAS 39, and so it is difficult to draw any analogy when analysing the subject matter under IFRS 9. However, that Committee member expressed his view that although the IG was not included in IFRS 9, the Board do not think the IG is not effective and many people actually follow the guidance set out in the IG. The Chair supplemented that IG are only examples designed to explain the requirements of the standards and cannot override the requirements of the standard. For the subject matter discussed, it is more appropriate to use the requirements in the standard and therefore the IG is not used. The Chair disagreed with a suggestion to indicate in the tentative agenda decision the application of the IG.

A few Committee members did not agree with the staff analysis on "we would not expect an entity’s risk management activities to change simply because of a change in accounting requirements", especially on those new accounting requirements. There was a 'natural hedge' under the existing accounting standard. As a result of the new accounting standard, the entity's risk management activities may try to change to hedge the volatility associated with the financial statements and so that would be part of the risk management activities. The staff responded that the entity needed to be genuinely managing the foreign exchange risk inherent in the non-financial asset (instead of just finding items to offset on the financial statements) in order to apply hedge accounting. One of the qualifying hedging relationships must have hedged item and the hedged risk, which are not affected by the change in accounting requirements. However, the staff agreed that 'accounting requirements' is a very broad statement and entities may manage it in many ways, and therefore agreed with the Committee members' view to remove this from the tentative agenda decision.

Another Committee member found the statement in the tentative agenda decision 'depending on the particular facts and circumstances, a non-financial asset may be priced only in a currency other than an entity's functional currency' could be misleading. The staff said that this sentence refers to a situation where a component of the asset is routinely priced in a currency other than the entity's functional currency, rather than the overall price of the asset.

The Committee decided, by a majority of votes, not to add the matter to the standard-setting and to adopt the tentative agenda decision, subject to the changes of removing the 'accounting requirements' paragraph.

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