Practical guide on general hedge accounting Dec 2013 | Page 9

Practical guide

3.1.

Formal designation and documentation

The nature of IFRS 9’s documentation requirements is not very different from the requirements in IAS 39.
Formal designation and documentation must be in place at the inception of the hedge relationship. As a result,
from the documentation point of view, there is not much relief from the administrative work necessary to start
hedge accounting.
Entities should also take into consideration that, as a result of the new hedge accounting requirements under
IFRS 9, documentation will no longer be static but must be updated from time to time. Examples of situations
where modification of the hedge documentation would be required are where the hedge ratio is rebalanced
(see below) or where the analysis of sources of hedge ineffectiveness is updated.
In addition, at the date of transition to IFRS 9, entities will need to update their hedge documentation for all
their existing hedging relationships under IAS 39 that continue to be eligible under the new standard, in order
to comply with the IFRS 9 documentation requirements. Some of the expected changes are the incorporation of
the hedge ratio and the expected sources of ineffectiveness (since this is not required by IAS 39) and the
removal of the retrospective effectiveness test (which is no longer required under IFRS 9).

3.2.

Eligible items

The hedging relationship should consist only of eligible hedging instruments and hedged items. There are
changes to what is eligible for both hedged items and hedging instruments, which are discussed in detail in
sections 4 and 5 below.

3.3.

Hedge effectiveness

Hedge effectiveness is defined as the extent to which changes in the fair value or cash flows of the hedging
instrument offset changes in the fair value or cash flows of the hedged item.
IFRS 9 introduces three hedge effectiveness requirements:

3.3.1. Economic relationship
IFRS 9 requires the existence of an economic relationship between the hedged item and the hedging
instrument. So there must be an expectation that the value of the hedging instrument and the value of the
hedged item would move in the opposite direction as a result of the common underlying or hedged risk. For
example, this is the case for forecast fixed interest payments and an interest rate swap that receives fixed
interest payments and pays variable interest.
An on-going analysis of the possible behaviour of the hedging relationship during its term is required in order
to ascertain whether it can be expected to meet the risk management objective.
PwC insight:
Whilst the requirement for an economic relations \\