IFRS 9 — Hedging variability in cash flows due to real interest rates (Agenda Paper 4)

Date recorded:


In its December 2020 meeting, the Committee discussed a submission about applying the hedge accounting requirements in IFRS 9 for which the objective is to fix the cash flows in real terms. In the fact pattern described, an entity wants to hedge a floating rate (LIBOR) debt with an inflation swap (which swaps the variable interest cash flows of the floating debt for variable cash flows based on inflation index) in a cash flow hedge. The submitter asked whether a hedge of the variability in cash flows arising from the changes in the real interest rate, could rebut the presumption in IFRS 9:B6.3.13 and be accounted for as a cash flow hedge. The Committee members generally agreed with the staff's conclusion that hedge accounting cannot be applied to the inflation swap in the fact pattern described.

Six comment letters were received and half of the respondents agreed with the outcome of the tentative agenda decision, while the other half did not support it, citing different reasons for their disagreement.

Staff analysis

The three respondents who disagreed with the conclusion were of the view that if a term structure of zero-coupon real interest rate can be identified in a specific market as set out in IFRS 9:B6.3.14, the rebuttable presumption in IFRS 9:B6.3.13 can equally be applied to cash flow hedging relationships. Inflation could be separately identifiable and reliably measurable in a sufficiently liquid market. The staff agreed that the inflation in a particular market could be separately identifiable as a risk component that influences the fair value of the debt instruments which is consistent with what is mentioned in IFRS 9:B6.3.14. However, it is not applicable to all hedging relationships. The staff noted that the Board deliberately placed a high burden of proof on concluding that a non-contractually specified inflation risk component is separately identifiable and reliably measurable. Therefore, the staff were of the view that, for the purpose of a cash flow hedge, the existence of a zero-coupon real interest rate curve does not in itself overcome the rebuttable presumption to conclude that there is a non-contractually specified real interest rate risk component.

When analysing the variability in cash flows attributable to a particular risk, respondents considered that changes in the real interest rate directly influence contractual benchmark interest rate cash flows and these alleged real interest rate cash flows can be fixed in nominal terms. The staff acknowledge that the nominal interest rate might be indirectly influenced by the inflation rate and the real interest rate over a period. However, under general economic principles, nominal interest rates are being used to influence inflation instead of the other way around (i.e. inflation influencing interest rate). Therefore, the "link" between a change in the nominal interest rate and the inflation rate is too indirect to rebut the presumption in IFRS 9:B6.3.13.

Some respondents also raised concerns that the ineligibility of the application of hedge accounting would be inconsistent with the risk management strategy and the objective for undertaking the hedge. They considered the use of inflation swaps an important tool to manage debt issuances and the use of inflation-linked swaps in combination with a fixed-rate debt provides a valid economic offset to regulated entities' exposure. Nonetheless, the staff said that an entity's risk management strategy is only one of the qualifying criteria but could not in itself determine whether a hedging relationship qualifies for hedge accounting.

Staff recommendation

Based on the above analysis, the staff ask whether the Committee agrees with the recommendation to finalise the agenda decision.


Committee members generally appreciated the work of drafting this complicated matter and found the conclusion convincing. Most of them agreed with finalising the agenda decision.

Most of the Committee members welcomed that the agenda decision highlights several points in the application of IFRS 9 to reach the conclusion.  Firstly, cash is by nature denominated in nominal terms and there is no exposure to variability in cash flows arising from real interest rate. Secondly, though nominal interest rates maybe indirectly be affected by interest rate and inflation, there is no direct linkage because LIBOR also fluctuates due to other factors. Therefore, the basic concept in a cash flow hedge that the risk benchmark needs to be separately identifiable is not met. Moreover, while they showed sympathy to the concerns raised on the outcome of the application, they agreed that an entity's risk strategy alone is not a determinative factor for the application of a cash flow hedge. They also observed that the rebuttable presumption in IFRS 9:B6.3.13 added by the Board is a high hurdle to overcome for a cash flow hedge. 

Committee members made a few suggestions to change the wording in the agenda decision mainly to align the wording with IFRS 9 or add more linkage to the requirements in IFRS 9. They also considered it is not appropriate to draw a conclusion on whether cash flow hedge accounting could be applied because this is beyond the scope of the agenda decision.

The Committee decided, with 13:1 votes, to finalise the agenda decision with the suggested changes made by Committee members. At the same time, a brief summary of the fact pattern and conclusion will be brought to the Board due to the concerns raised by the respondents.

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