On 19 November 2013, new rules for hedge accounting were issued in the amendment to IFRS 9.
A hedging is making an investment or acquiring some derivative or non-derivative instruments in order to offset potential losses (or gains) that may be incurred on some items as a result of particular risk.
A hedge accounting means designating one or more hedging instruments so that their change in fair value offsets the change in fair value or the change in cash flows of a hedged item.
Hedge accounting rules in IAS 39 are too complex and strict. Many companies that actively pursued hedging strategies could not apply hedge accounting in line with IAS 39 because the rules did not allow it.
As a result, new hedging rules in IFRS 9 were issued.
1. Optional: A hedge accounting is an option, not an obligation — both in line with IAS 39 and IFRS 9.
2. Terminology: Both standards use the same most important terms: hedged item, hedging instrument, fair value hedge, cash flow hedge, hedge effectiveness, etc.
3. Hedge documentation: Both IAS 39 and IFRS 9 require hedge documentation in order to qualify for a hedge accounting.
4. Categories of hedges: Both IAS 39 and IFRS 9 arrange the hedge accounting for the same categories: fair value hedge, cash flow hedge and net investment hedge.
5. Hedge ineffectiveness: Both IAS 39 and IFRS 9 require accounting for any hedge ineffectiveness in profit or loss.
6. Use of written options as hedging instruments is prohibited by both standards.
Differences in hedge accounting between IAS 39 and IFRS 9
Under new IFRS 9 rules, you can apply hedge accounting to more situations as before because the rules are more practical, principle based and less strict.
IFRS 9 allows you to use broader range of hedging instruments, so now you can use any non-derivative financial asset or liability measured at fair value through profit or loss.
With regard to non-financial items IAS 39 allows hedging only a non-financial item in its entirety and not just some risk component of it.
IFRS 9 allows hedging a risk component of a non-financial item if that component is separately identifiable and measurable.
IAS 39 requires numerical tests of hedge effectiveness, both prospectively and retrospectively.
IFRS 9 outlines more principle-based criteria with no specific numerical thresholds.
IAS 39 required terminating the current hedge relationship and starting the new one.
IFRS 9 makes it easier, because it allows certain changes to the hedge relationship without necessity to terminate it and to start the new one.
IAS 39 allowed companies to discontinue hedge accounting voluntarily, when the company wants to. IFRS 9 does not permit that.
There is a number of other differences between hedge accounting under IAS 39 and IFRS 9 — please check this video to learn more!
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