IFRS 9 — Application of the highly probable requirement in a cash flow hedge relationship

Date recorded:

Application of the highly probable requirement in a cash flow hedge relationship (Agenda Paper 10)


In September 2018, the Committee discussed a request regarding the application of the term “highly probable” in assessing whether a hedging relationship qualifies for hedge accounting. The fact pattern in the request is about a so-called ‘load following swap’ of which the variable cash flows from the energy sold at spot rates is swapped into fixed cash flows. The notional amount of the hedged item is variable as settlements will be based on the actual quantity of electricity sold. In addition, the request asked whether the hedged item must be fixed (in volume terms) at the inception of the hedging relationship in assessing hedge effectiveness.

The Committee agreed to adopt the agenda decision which stated that the entity considers uncertainty over both the timing and the magnitude of the forecast transaction in assessing whether the forecast transaction is highly probable. The entity also considers the length of time until a forecast transaction is projected to occur in determination of probability. In addition, a specific contractual term of a hedging instrument (e.g. a load following swap) does not affect the assessment of whether a forecast transaction is highly probable.

Comment letters were received and some respondents made comments on the Committee's technical analysis and suggested removing the highly probable requirement for an entity to apply hedge accounting.

Staff analysis

Some respondents said, in economic terms, the arrangement of a load following swap results in a perfect hedge of the volumes sold for changes in the spot price as there will never be a mismatch in volumes between the actual volumes of electricity sold into the grid and the notional. The staff analyse that a hedging relationship qualifies for hedge accounting only if all qualifying criteria are met and hence a perfect hedge in economic terms does not mean qualification for hedge accounting.

Some respondents said designating all (100 per cent) forecast sales of a specified type/source in a specified period would meet the guidance of sufficient specificity set out in IAS 39. The staff hold the same view as in previous meeting – a forecast transaction cannot be specified solely as a percentage of sales or purchases (i.e. 100% of sales) because that would lack the required specificity on the basis that the identification of whether the transaction is the hedge transaction only happened at the end of a specified period rather than at the time when sales occur. The staff also consider the entire item has to meet the hedge accounting qualifying criteria (i.e. highly probable requirement) before designating a proportion of an item.

Two respondents suggested amendments to IAS 39 and IFRS 9 by removing highly probable requirements which could better reflect the hedging strategy of the entity. The staff consider doing so will have significant impact in terms of discontinuation of hedge relationship and measurement of hedged item.

Some respondents commented on the use of Implementation Guidance in IAS 39 Financial Instruments: Recognition and Measurement. The Committee noted that the highly probable requirement in IFRS 9 is not new and not carrying forward the Implementation Guidance in IAS 39 did not mean that the Board had rejected the guidance.

Staff recommendation

The staff recommend finalising the tentative agenda decision with some changes in wordings.


Most Committee members agreed with the staff analysis and the conclusion. However, they acknowledged that the conclusion would result in perfect economic hedges not being eligible for hedge accounting. Some Committee members noted that the Implementation Guidance in IAS 39 (IAS 39 IG) was withdrawn and should therefore not be mentioned in the Agenda Decision. Instead, the "highly probable" threshold in IAS 39 and IFRS 9 can help to arrive at the conclusion in the Agenda Decision. The Chair agreed, but considered the usefulness of the IAS 39 IG in explaining the matter. She suggested to reduce the reference to the IAS 39 IG in the Agenda Decision.

Some Committee members were concerned that the Agenda Decision provides no answer to the question of whether the volume of the hedged item must be fixed in order to be eligible for hedge accounting. The Chair confirmed that it is not necessary to address this in the Agenda Decision and suggested to remove the reference to "terms of hedging instruments".

The Committee decided, by a majority of votes, to publish the Agenda Decision with these amendments.

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