Practical guide on general hedge accounting Dec 2013 | Page 18

Practical guide

value of the option. However, designating the intrinsic value only usually increases the volatility in P&L, due to
the fact that changes in the time value of the option are recognised in P&L.
IFRS 9 changed the accounting requirements on using purchased options as hedging instruments. It views a
purchased option as similar to purchasing insurance cover with the time value being the associated cost. If an
entity elects to designate only the intrinsic value of the option as the hedging instrument, it must account for
the changes in the time value in OCI. This amount will be removed from OCI and recognised in P&L, either over
the period of the hedge if the hedge is time related (for example, six-month fair value hedge of inventory), or
when the hedged transaction affects P&L if the hedge is transaction related (for example, a forecast sale). This
should result in less volatility in P&L for these option-based hedges, and it removes an obstacle to sensible risk
management practice.
An entity needs to take into consideration that, once it designates the intrinsic value of the option, the
accounting introduced by IFRS 9 is not optional, but mandatory