Practical guide on general hedge accounting Dec 2013 | Page 19

Practical guide

4.6. Accounting for currency basis spreads
IAS 39 did not prescribe specific accounting criteria for currency basis spreads (that is, the liquidity charge for
exchanging different currencies that is inherent in a foreign exchange contract). Many entities included this
spread when applying the hypothetical derivative method for assessing hedge effectiveness for cash flow
hedges. The hypothetical derivative is an accepted mathematical expedient used by entities to calculate the
value of the hedged item in cash flow hedges.
FRS 9 states that a hypothetical derivative cannot include features that do not exist in the hedged item. It
clarifies that a hypothetical derivative cannot simply impute a charge for exchanging different currencies (that
is, the currency basis spread), even though actual derivatives under which different currencies are exchanged
might include such a charge (for example, cross-currency interest rate swaps).
Under IFRS 9, where an entity separates the foreign currency basis spread from a financial instrument and
excludes it from the designation of that financial instrument as the hedging instrument, the entity can account
for the changes in the currency basis spread in the same manner (that is, transaction related or time-period
related) as applied to the forward element of a forward contract, as noted in 4.5 above.
PwC insight
The possibility of accounting for the currency basis spread as a cost of hedging represents a significant
improvement as compared to the Board’s proposals in the review draft on hedge accounting (published in
September 2012), which implied that changes in currency basis spreads would be accounted for immediately
in P&L. This is good news for entities and will help to mitigate volatility in P&L.

General hedge accounting

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