IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS : Practical Implementation Guide and Workbook

If instead the loss on the hedging instrument in the first period after designation is $100 and the

gain on the hedged item is $90. a loss of $ /0 is included in p rofit or loss due to ineffec tiveness.

because the cumulative gain or loss on the hedging instrument exceeds the cumulative gain or loss

on the hedged item ( "overhedging ").

8.8 Disco ntinuation of Hedge Accounting

8.8.1 In any of these circumstances, an entity should discontinue hedge accounting prospectively :

The hedging instrument expire s or is sold, terminated, or exerci sed .

The hedge no longer meets the hedge accounting conditions.

The entit y revoke s the hedge designati on.

A hedged forecasted transacti on is no longer expected to occur.

8.8.2 For discontinued fair value hedges, any previous hedge accounting adj ustment to the car–

rying amount of hedged interest-be aring assets or liabiliti es are amortized over the remaining ma–

turit y of those assets and liabilities. Othe r hedge accounting adjustments to the carryi ng amount of

hedged items remain in the carrying amount.

8.8.3 For discontinued cash flow hedges, hedging gains and losses that have been deferred in eq–

uity remain in equ ity until the hedged item affects profit or loss unless

A foreca st transaction is no longer expected to occur, in which case the deferred gain or loss

is recognized immedi ately in profit or loss.

A forecast transaction results in the recogn ition of a nonfinancial asset or nonfinancialliabil–

ity and the entity has made an accounting policy choic e to include those deferred gains and

losses in the initia l carry ing amount of the nonfinancial asset or nonfin ancial liability.

8.9 Macrohedging

8.9.1 One issue that has been the subject of cons iderable debate is the hedge accounting treatment

of derivatives that are used to manage interes t rate risk on a net, portfolio basis ("macrohedging") .

For instance, banks, as part of their asset-li abilit y management activities , for risk management pur–

poses may wish to offset risk exposures on a net basis. However, lAS 39 does not permit an entity

to designate a net position (i.e., a net amount of assets less liabilit ies or a net amount of cash in–

flows less cash outflows) as a hedged item because of diffi cult ies associated with assigning hedge

accounting adjustments to individual hedged assets or liabilities and measuring effec tiveness.

Pr actical Insigh t

It is often possible to quali fy for cash flow hedge accounting for hedges of a net exposure by

designating as the hedged item the exposure to change s in cash flows assoc iated with a fore–

cast bottom level portion of cash inflows or cash outflows in a particular future time period.

For instance, if the entity forecasts cash inflows of $100 and cas h outflows of $ 120 on a macro

basis, it may designate a cash flow hedge for the interest rate risk associated with the refi–

nancing or reinvestment of the first $20 of cash outflows in a particular period. In that case, as

long as the entity has at least $20 of cash outflows in that period , the hedge may be considered

effective.

8.9.2 In 2004, the IASB issued amendments to lAS 39 to relax the hedge accounting require–

ments associated with portfolio hedge s of interest rate risk on a fair value hedge accounting basis.

Those amendments provide a methodology for how to achieve fair value hedge accounting for

portfolio hedges of intere st rate risk.