IAS 39 | Financial Instruments: Recognition and Measurement

2

Scope

This Standard shall be applied by all entities to all financial instruments within the scope of IFRS 9 if, and to the extent that: (a) IFRS 9 permits the hedge accounting requirements of this Standard to be applied; and (b) the financial instrument is part of a hedging relationship that qualifies for hedge accounting in accordance with this Standard.

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Definitions

The terms defined in IFRS 13, IFRS 9 and IAS 32 are used in this Standard with the meanings specified in those Standards.

9

Hedge Definitions

The following terms are used in this Standard with the meanings specified:

• A firm commitment is a binding agreement for the exchange of a specified quantity of resources at a specified price on a specified future date or dates.
• A forecast transaction is an uncommitted but anticipated future transaction.
• A hedging instrument is a designated derivative or (for a hedge of the risk of changes in foreign currency exchange rates only) a designated non-derivative financial asset or non-derivative financial liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item.
• A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that (a) exposes the entity to risk of changes in fair value or future cash flows and (b) is designated as being hedged.
• Hedge effectiveness is the degree to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.

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Application Choice

If an entity applies IFRS 9 and has chosen to continue applying IAS 39 hedge accounting, it applies the requirements in this Standard. For a fair value hedge of interest rate exposure of a portfolio, it may also apply IAS 39 requirements.

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Qualifying Instruments

A derivative may be designated as a hedging instrument (except some written options). A non-derivative financial asset/liability may be designated as a hedging instrument only for a hedge of foreign currency risk.

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External Party

Only instruments involving a party external to the reporting entity can be designated as hedging instruments. Intragroup transactions are eliminated on consolidation and do not qualify, except in separate financial statements.

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Designation

A hedging instrument is normally designated in its entirety. Exceptions: separating intrinsic/time value of an option; separating interest/spot price of a forward.

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Proportion

A proportion (e.g., 50%) of a hedging instrument may be designated, but a hedging relationship may not be designated for only a portion of the time period the instrument remains outstanding.

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Multiple Risks

A single instrument may hedge more than one risk if risks are clearly identified, effectiveness can be demonstrated, and specific designation is ensured.

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Combination

Two or more derivatives (or proportions) may be viewed in combination and jointly designated as a hedging instrument. Interest rate collars that are net written options do not qualify.

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Hedged Item Types

A hedged item can be a recognised asset/liability, unrecognised firm commitment, highly probable forecast transaction, or net investment in a foreign operation.

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External Party Items

Only assets/liabilities/commitments involving an external party can be designated as hedged items. Intragroup transactions do not qualify in consolidated statements, except for foreign currency risk of intragroup monetary items or highly probable forecast intragroup transactions that affect consolidated profit.

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Portion Designation

A financial item may be hedged for risks associated with only a portion of its cash flows or fair value (e.g., interest rate risk portion), provided effectiveness can be measured.

81A

Portfolio Hedge

In a fair value hedge of interest rate risk of a portfolio, the portion hedged may be designated in terms of an amount of currency (e.g., amount of dollars) rather than individual assets.

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Non-Financial Items

Non-financial items shall be designated as hedged items either for foreign currency risks or in their entirety, because isolating other specific risks is difficult.

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Group Designation

Similar assets/liabilities shall be aggregated and hedged as a group only if they share the risk exposure designated.

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Net Position

Comparing a hedging instrument with an overall net position (e.g., net of fixed rate assets and liabilities) does not qualify for hedge accounting; specific items must be designated.

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Hedge Accounting Principle

Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged item.

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Hedge Types

Three types: (a) Fair value hedge (exposure to fair value changes); (b) Cash flow hedge (exposure to cash flow variability); (c) Hedge of a net investment in a foreign operation.

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Qualifying Criteria

To qualify: (a) Formal designation and documentation at inception (risk objective, strategy, instrument, item, risk, effectiveness assessment method); (b) Hedge expected to be highly effective (offsetting changes); (c) Forecast transactions must be highly probable; (d) Effectiveness reliably measurable; (e) Assessed ongoing and determined actually highly effective (80-125%).

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Fair Value Hedge Accounting

(a) Gain/loss from remeasuring hedging instrument recognised in profit or loss; (b) Gain/loss on hedged item attributable to hedged risk adjusts carrying amount and is recognised in profit or loss.

89A

Portfolio Presentation

For portfolio interest rate hedges, the gain/loss on the hedged item may be presented in a separate line item within assets or liabilities.

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Discontinuation (FV)

Discontinue prospectively if: instrument expires/sold/terminated (replacement/rollover is not expiration if documented); hedge no longer meets criteria; or entity revokes designation.

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Amortisation

Adjustments to carrying amount of hedged financial instruments are amortised to profit or loss. Amortisation begins no later than when the item ceases to be adjusted for changes in fair value.

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Firm Commitment

When a firm commitment is hedged (fair value hedge), cumulative changes in fair value attributable to the hedged risk are recognised as an asset/liability with gain/loss in profit or loss.

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Cash Flow Hedge Accounting

(a) Effective portion of gain/loss on hedging instrument recognised in OCI; (b) Ineffective portion recognised in profit or loss.

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Equity Adjustment

Separate equity component adjusted to the lesser of: cumulative gain/loss on instrument; and cumulative change in fair value of expected future cash flows on hedged item.

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Reclassification (Financial)

If forecast transaction results in financial asset/liability, gains/losses in equity are reclassified to profit or loss in the same periods the cash flows affect profit or loss (e.g., interest income periods).

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Reclassification (Non-Financial)

If forecast transaction results in non-financial asset/liability, the entity chooses either: (a) reclassify from equity to profit or loss when asset/liability affects profit (e.g., depreciation); or (b) remove from equity and include in initial cost of asset/liability (basis adjustment).

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Discontinuation (CF)

Discontinue prospectively if: instrument expires/sold; hedge no longer meets criteria; forecast transaction no longer expected (reclassify equity to profit immediately); or entity revokes designation. If transaction still expected, amounts remain in equity until it occurs.

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Net Investment Hedge

Accounted for similarly to cash flow hedges: effective portion in OCI; ineffective portion in profit or loss. Accumulated OCI is reclassified to profit or loss on disposal of the foreign operation.

102A

IBOR Reform Exceptions

Temporary exceptions apply to hedging relationships directly affected by interest rate benchmark reform (uncertainties about timing/amount of cash flows).

102D

Highly Probable Exception

For the highly probable requirement, assume the benchmark rate is not altered by reform.

102G

Effectiveness Exception

An entity is not required to discontinue a relationship because actual results do not meet the 80-125% effectiveness range during the reform uncertainty period.

102P

Phase 2 Amendments

When exceptions cease, entities must amend designations to reflect changes required by reform (e.g., designating alternative benchmark rate) without discontinuing the hedge.

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Effective Date

Standard applies for annual periods beginning on or after 1 January 2005.