Practical guide on general hedge accounting Dec 2013 | Page 22
Practical guide
5.3.
Hedging groups of net positions
IFRS 9 provides more flexibility for hedges of groups of items, although, as noted earlier, it does not cover
macro hedging. Treasurers commonly group similar risk exposures and hedge only the net position. To
illustrate what is meant by a net position, consider the following example.
Example:
A EUR-functional currency entity has a sales department that sells certain items in USD. At the same time, the
purchasing department buys certain products in USD. Each department is unaware of the other’s activities, but
both want to hedge their forecast USD sales and purchases respectively. Assume that the sales department has
USD100 of sales in six months’ time, so it enters into a forward contract with the entity’s central treasury
department. The purchasing department has forecast purchases of USD90, also in six months’ time, and it also
enters into an internal derivative with the central treasury department. Each department wants to use its
derivative as a hedged item, but it cannot because the derivative is internal, and so it is eliminated
on consolidation.
However, in order to hedge the group’s exposure, the treasury department enters into a forward with a bank for
USD10. By doing this, the group is economically hedged. However, under IAS 39, it was not possible to
designate the net position of USD10 (comprised of USD100 sales and USD90 purchases) as a hedged item.
Instead, the group had to designate USD10 out of the USD100 of future sales as the hedged item. This did not
reflect the entity’s risk management strategy and is not how the entity tracked the appropriateness of the
economic hedge relationship. It is no surprise that this was a common complaint from preparers about IAS 39.
Under IFRS 9, however, a net position that incorporates offsetting positions can be hedged, where all items
included in the group are individually eligible as hedged items and the items in the group are managed together
on a group basis for risk management purposes. This means that the group can now apply hedge accounting to
a net position comprised of sales of USD100 and purchases of USD90 with a USD10 derivative, which mirrors
the entity’s risk management.
For cash flow hedges of a group of items that are expected to affect P&L in different reporting periods, the
qualifying criteria are:
Only hedges of foreign currency risk are allowed.
The items within the net position must be specified in such a way that the pattern of how they will affect
P&L is set out as part of the initial hedge designation and documentation (this should include at least the
reporting period, nature and volume).
PwC insight:
The ability to hedge net positions under IFRS 9 is a step forward, in that it allows hedge designation in a way
that is consistent with an entity's risk management strategy. However, IFRS 9 requires the presentation of the
gains and losses on recycling as a separate line item in P&L (separate from the hedged items), and so it does
not allow an entity to present the post-hedging results of its commercial activities for those line items.
In addition, net nil positions (that is, where hedged items among themselves fully offset the risk that is
managed on a group basis) are now allowed to be designated in a hedging relationship that does not include a
hedging instrument, provided that all the following criteria are met:
The hedge is part of a rolling net risk hedging strategy (that is, the entity routinely hedges new positions of
the same type);
The hedged net position changes in size over the life, and the entity uses eligible hedging instruments to
hedge the net risk;
Hedge accounting is normally applied to such net positions; and
Not applying hedge accounting to the net nil position would give rise to inconsistent accounting outcomes.
The Board expects that hedges of net nil positions would be coincidental and therefore rare in practice.
General hedge accounting
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