Practical guide on general hedge accounting Dec 2013 | Page 6

Practical guide

Future cash flows might relate to existing assets and liabilities, such as future interest payments or receipts on
floating rate debt. Future cash flows can also relate to forecast sales or purchases in a foreign currency.
Volatility in future cash flows might result from changes in interest rates, exchange rates, equity prices or
commodity prices.
Provided the hedge is effective, changes in the fair value of the hedging instrument are initially recognised in
OCI. The ineffective portion of the change in the fair value of the hedging instrument (if any) is recognised
directly in P&L.
The amount recognised in OCI should be the lower of:


The cumulative gain or loss on the hedging instrument from the inception of the hedge, and



The cumulative change in the fair value (present value) of the expected cash flows on the hedged item from
the inception of the hedge.

If the cumulative change in the hedging instrument exceeds the change in the hedged item (sometimes referred
to as an ‘over-hedge’), ineffectiveness will be recognised. If the cumulative change in the hedging instrument is
less than the change in the hedged item (sometimes referred to as an ‘under-hedge’), no ineffectiveness will be
recognised. This is different from a fair value hedge, in which ineffectiveness is recognised on both over – and
under-hedges.
For cash flow hedges of a forecast transaction which result in the recognition of a financial asset or liability, the
accumulated gains and losses recorded in equity should be reclassified to P&L in the same period or periods
during which the hedged expected future cash flows affect P&L. Where there is a cumulative loss on the hedging
instrument and it is no longer expected that the loss will be recovered, it must be immediately recognised
in P&L.
What has changed?
IFRS 9 introduces changes to the cash flow hedge accounting model, as follows:


For cash flow hedges of a forecast transaction which results in the recognition of a non-financial item (such
as a fixed asset or inventory), or where a hedged forecast transaction for a non-financial asset or a nonfinancial liability becomes a firm commitment for which fair value hedge accounting is applied, the
carrying value of that item must be adjusted for the accumulated gains or losses recognised directly in
equity (often referred to as ‘basis adjustment’).
Under IAS 39, the entity could elect, as a policy choice, either the treatment described in the preceding
paragraph or to maintain the accumulated gains or losses in equity and reclassify them to P&L at the same
moment that the non-financial item affects P&L. This accounting policy choice is no longer allowed under
IFRS 9.



Where the net position of a group of items containing offsetting risk positions is designated as the hedged
item, the cash flow hedge model can only be applied to the hedge of foreign currency risk. The designation
of that net position must specify both the reporting period in which the forecast transactions are expected
to affect P&L and also the nature and volume that are expected to affect P&L in each period. Hedging gains
or losses must be presented in a separate line item in the statement of P&L and OCI. IAS 39 did not allow
net positions to be designated as the hedged item.



For cash flow hedges of a group of items with no offsetting risk position, the presentation of hedging gains
or losses are apportioned to the line items affected by the hedged items. IAS 39 did not prescribe the
presentation of gains or losses in P&L.

General hedge accounting

PwC  4