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IFRS 9: Financial Instruments

IASB Meeting Summaries and Observer Notes

 IASB 24 August 2010



At this meeting the Board continued its discussions of hedge effectiveness testing (ie whether a hedging relationship qualifies for hedge accounting). The Board considered a staff paper summarising the approach to effectiveness testing that had been discussed at previous meetings.

The Board tentatively agreed on a hedge effectiveness testing approach as follows:

  • The objective of the effectiveness assessment is to ensure that the hedging relationship will produce an unbiased result and minimise expected ineffectiveness. Thus, for accounting purposes hedging relationships should not reflect a deliberate mismatch between the weightings of the hedged item and of the hedging instrument within the hedging relationship.
  • In addition to that objective, hedging relationships are expected to achieve offsetting of changes between the hedged item and the hedging instrument that are attributable to the hedged risk (other than accidental offsetting).
  • The assessment is forward looking and is performed at inception and on an ongoing basis.
  • The type of assessment (quantitative or qualitative) depends on the relevant characteristics of the hedging relationship and on the potential sources of ineffectiveness. The main source of information to perform the effectiveness assessment is entities' risk management.
  • No particular methods for assessing hedge effectiveness are prescribed. However, the method used should be robust enough to capture the relevant characteristics of the hedging relationship including the sources of ineffectiveness.
  • Changes in the method for assessing effectiveness are mandatory if there are unexpected sources of ineffectiveness (ie new sources not initially anticipated), or if, upon a rebalancing in the hedging relationship, the method previously used is no longer capable of capturing the sources of ineffectiveness and is therefore now not capable of demonstrating whether the hedge produces an unbiased result and minimises ineffectiveness.

Eligible groups of hedged items

At this meeting the IASB discussed whether part of a group of existing items (eg part of a group of firm commitments, debt instruments, etc), could be identified as a 'layer' of the group for the purpose of designation as a hedged item. (A layer is a nominal amount that consists of some items of a population that share the same risk, eg a fixed nominal amount of purchases denominated in a foreign currency that equates to the first 7 out of 10 similar firm commitments that are fulfilled.)

The Board considered specific examples. For the type of examples presented, the Board tentatively decided that when an entity's risk management strategy is to hedge a layer of a group of existing items, any hedge designation for accounting purposes must be on the same basis.

Hedge accounting for investment in equity instruments at fair value through OCI

At this meeting, the Board discussed whether investments in equity instruments classified as at fair value through other comprehensive income (OCI) in accordance with IFRS 9 Financial Instruments should be eligible for hedge accounting.

IAS 39 Financial Instruments: Recognition and Measurement requires that the exposure hedged by a fair value hedge or a cash flow hedge could affect profit or loss. Hence, if an exposure affects OCI (rather than profit or loss) an entity cannot achieve hedge accounting because any related hedge would not meet the definition of a hedging relationship.

The Board noted that this issue related to the much broader issue of the use of OCI. The Board also noted that permitting hedge accounting for such equity investments would necessitate a different hedge accounting approach than the approach in IAS 39, and would differ from the revised approach that the Board is currently developing. The Board tentatively decided to propose prohibiting the application of hedge accounting to investments in equity instruments designated as at fair value through OCI.

Date: 8/24/2010