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Work plan for Interpretations (IFRICs)

 IFRIC 16 Hedges of a Net Investment in a Foreign Operation



IFRIC 16 applies to an entity that hedges the foreign currency risk arising from its net investments in foreign operations and wishes to qualify for hedge accounting in accordance with IAS 39.

For convenience the Interpretation refers to such an entity as a parent entity, however, all references to a parent entity apply equally to an entity that has a net investment in a foreign operation that is a joint venture, an associate or a branch.

The Interpretation does not apply to other types of hedge accounting; it should not be applied by analogy.

IFRIC 16 provides guidance on:

  • identifying the foreign currency risks that qualify as a hedged risk in the hedge of a net investment in a foreign operation;
  • where, within a group, hedging instruments that are hedges of a net investment in a foreign operation can be held to qualify for hedge accounting; and
  • how an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item.

Reasons for IFRIC 16

Some companies hedge the foreign currency risk arising from their net investments in foreign operations and wish to qualify for hedge accounting in accordance with IAS 39.

One issue is whether the risk arises from foreign exchange differences between the functional currency of the foreign operation and the parent�s functional currency or between the functional currency of the foreign operation and the presentation currency of the parent�s consolidated financial statements.

Another issue is which entity within a group could hold a hedging instrument in a hedge of a net investment in a foreign operation, in particular whether the parent entity holding the net investment in a foreign operation must also hold the hedging instrument.

The third related to how an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item when the entity disposes of the investment.

Interested parties had different views on both issues, resulting in considerable diversity in practice.

Impact of IFRIC 16

The main expected change in practice is to eliminate the possibility of an entity qualifying for hedge accounting for a hedge of the foreign exchange differences between the functional currency of a foreign operation and the presentation currency of the parent�s consolidated financial statements.

The IFRIC recognises the difficulty that entities would face in preparing adequate documentation from the inception of the hedge relationship and therefore requires prospective application of the guidance.

Effective date

IFRIC 16 is effective for annual periods commencing on or after 1 October 2008.

Discussed by the IFRIC

 

 

 

 

 

 

 

 

 

Further information

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email: ifric@ifrs.org