Hedge Accounting under IFRS - all set for change - Commentary from Ernst & Young
The proposed changes — at a glance
- Hedging by risk components will be permitted for both financial and non-financial items, if separately identifiable and measurable
- Eligible hedged items include combinations of derivatives and non-derivatives, portions or proportions of nominal amounts and one-sided risks
- Hedging instruments can include non-derivatives
- The bright line test of 80-125% for hedge effectiveness testing will be eliminated
- The assessment of hedge effectiveness will be prospective and driven by the risk management strategy — with a requirement that no systematic under- or over hedge-hedging is expected
- Rebalancing of the hedge ratio will be required when necessary to maintain the risk management objective
- Discontinuation of the hedge relationship will be mandatory if the hedging relationship no longer qualifies (including if risk management objective changes). Conversely, voluntary de-designation will not be permitted if the risk management
- objective continues to be met
- For fair value hedges, the hedged item will not be adjusted and the cumulative gains or losses attributable to hedged risk will be recorded in a separate balance sheet line. The fair value changes of both hedging instruments and hedged items will be taken to Other Comprehensive Income (OCI) and any ineffectiveness will be immediately taken to profit or loss
- It will not be possible to apply hedge accounting to equity instruments recorded at fair value through OCI
- There are new rules for hedges of groups of eligible hedged items
- There are significant new disclosure requirements
To view the full article by Ernst & Young