first-time adopters from restating transactions that occurred before the date of
transition to IFRSs.
A first-time adopter that derecognised non-derivative financial assets and financial
liabilities before the date of transition to IFRSs and chose not to restate retrospectively
will not have to recognise these items under IFRSs even if they meet the IFRS 9
recognition criteria. [IFRS 1.IG53-54]. However, IFRS
10 – Consolidated Financial
Statements – contains no specific transitional or first-time adoption provisions except
for those for non-controlling interests (see 4.8 below). Accordingly, its consolidation
requirements should be applied fully retrospectively by first-time adopters. For
example, an entity may have derecognised, under its previous GAAP, non-derivative
financial assets and financial liabilities when they were transferred to a structured entity
as part of a securitisation programme. If that entity is considered to be a controlled entity
under IFRS 10, those assets and liabilities will be re-recognised on transition to IFRSs
by way of the application of IFRS 10 rather than through application of IFRS 9. Of
course, if the structured entity itself then subsequently achieved derecognition of the
items concerned under the entity’s previous GAAP (other than by transfer to another
structured entity or member of the entity’s group), then the items remain derecognised
on transition. Some arrangements for the transfer of assets, particularly securitisations,
may last for some time, with the result that transfers might be made both before and
after (or on) the date of transition to IFRSs under the same arrangement. IFRS 1 clarifies
that transfers made under such arrangements fall within the first-time adoption
exception only if they occurred before the date of transition to IFRSs. Transfers on or
after the date of transition to IFRSs are subject to the full requirements of IFRS 9.
[IFRS 1.IG53].
236 Chapter
5
4.4
Hedge accounting: general
From 4.4 to 4.7 below, we discuss the hedge accounting treatment for first-time adopters
under IFRS 9.
First-time adoption issues relating to hedge accounting in the opening IFRS statement
of financial position are discussed at 4.5 below and subsequent measurement issues are
discussed in 4.6 below. Hedge accounting is dealt with comprehensively in Chapter 49.
In short:
• If designated as a hedge relationship under previous GAAP and the hedge
relationship is of a type that qualifies for hedge accounting under IFRS 9, which
consists only of eligible hedging instruments and eligible hedged items in
paragraph 6.4.1(a):
• an entity is required to reflect the hedge relationship in its opening IFRS
statement of financial position irrespective of whether the hedge designation,
documentation and effectiveness for hedge accounting under IFRS 9
(paragraph 6.4.1 (b)(c)) are met on or before the transition date; and
• if the hedge designation, documentation or effectiveness is not met by the
transition date, requirements in IFRS 9 to discontinue hedge accounting
apply subsequently.
• If designated as a hedge relationship under previous GAAP, but the hedge
relationship is of a type that does not qualify for hedge accounting under IFRS 9:
• An entity is required to remove that relationship from its opening IFRS
statement of financial position (except for the exception relating to a certain
net position designated as a hedged item under previous GAAP, see 4.5.2
below).
• Regardless of the designation under previous GAAP, if the qualifying criteria
including hedge designation, documentation and effectiveness for hedge
accounting that comply with paragraph 6.4.1 of IFRS 9 are met prior to the
transition date:
• hedge accounting is required from the date the qualifying criteria are met; but
• retrospective designation under IFRS is not permitted.
4.4.1
Paragraphs B5 and B6 of IFRS 1 when applying IFRS 9
Paragraphs B5 and B6 of IFRS 1 refer to ‘hedge relationship of a type’ and ‘conditions
for hedge accounting’ when specifying the recognition of hedging relationships in
the opening IFRS statement of financial position and subsequent accounting,
respectively. These descriptions were not modified to reflect requirements of
IFRS 9. However, IFRS 9 does not set out hedge relationship types or conditions for
hedge accounting. Instead, it sets out qualifying criteria in paragraph 6.4.1, which
consist of (a) eligibility, (b) formal designation and documentation, and (c) hedge
effectiveness. Therefore, the wording in paragraphs B5 and B6 of IFRS 1 is obsolete,
and IFRS 1 is relatively unclear as to whether the same two-step approach above
continues to apply.
First-time
adoption
237
In our view, the IASB did not intend to change the requirements of IFRS 1 for recognising
a hedging relationship in the opening IFRS statement of financial position or the
subsequent accounting upon issuance of IFRS 9 and we expect the IASB to amend the
wording to clarify that the reference to ‘a hedging relationship of a type that does not
qualify for hedge accounting’ in paragraph B5 of Appendix B to IFRS 1 relates only to the
qualifying criterion in paragraph 6.4.1(a) of IFRS 9 (i.e. eligible hedging instruments and
hedged items) and the ‘conditions for hedge accounting’ in paragraph B6 of Appendix B
to IFRS 1 relates to the qualifying criteria in paragraph 6.4.1(b)-(c) of IFRS 9. Discussions
in 4.4 to 4.7 below are based on this view.
4.4.2
Applicability of IAS 39 hedge requirements
A transition requirement of IFRS 9 for hedge accounting permits an existing IFRS
user to choose as its accounting policy to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements in Chapter 6 of IFRS 9.
[IFRS 9.7.2.21]. First-time adopters do not have this choice because paragraph 9 of
IFRS 1 prohibits first-time adopters from applying the transition provisions in other
IFRSs when transitioning to IFRS, except as specified in Appendices B-E. [IFRS 1.9].
Further, paragraphs B4 to B6 of IFRS 1 contain mandatory exceptions for hedge
accounting, but they do not refer to the transition requirements of IFRS 9, and the
basis for conclusion attached to IFRS 9 under the heading ‘Transition related to the
hedge accounting requirements’ states ‘The IASB decided not to change the
requirements of IFRS 1 for hedge accounting. The IASB noted that a first-time
adopter would need to look at the entire population of possible hedging relationships
and assess which ones would meet the qualifying criteria of the new hedge
accounting model’. [IFRS 9.BC7.52].
4.5
Hedge accounting in the opening IFRS statement of financial
position
4.5.1
Measurement of derivatives and elimination of deferred gains and
losses
Under its previous GAAP an entity’s accounting policies might have included a number
of accounting treatments for derivatives that formed part of a hedge relationship. For
example, accounting polici
es might have included those where the derivative was:
• not explicitly recognised as an asset or liability (e.g. in the case of a forward
contract used to hedge an expected but uncontracted future transaction);
• recognised as an asset or liability but at an amount different from its fair value (e.g.
a purchased option recognised at its original cost, perhaps less amortisation; or an
interest rate swap accounted for by accruing the periodic interest payments and
receipts); or
• subsumed within the accounting for another asset or liability (e.g. a foreign
currency denominated monetary item and a matching forward contract or swap
accounted for as a ‘synthetic’ functional currency denominated monetary item).
238 Chapter
5
Whatever the previous accounting treatment, a first-time adopter should isolate and
separately account for all derivatives in its opening IFRS statement of financial position
as assets or liabilities measured at fair value. [IFRS 1.B4(a)].
All derivatives are measured at fair value through profit or loss, other than those that
are financial guarantee contracts, a commitment to provide a loan at a below-market
interest rate or a loan commitment that is subject to the impairment requirements of
IFRS 9, as well as those that are designated and effective as hedging instruments.
Accordingly, the difference between the previous carrying amount of these derivatives
(which may have been zero) and their fair value should be recognised as an adjustment
of the balance of retained earnings at the date of transition to IFRSs. [IFRS 1.IG58A]. If an
entity cannot determine whether a particular portion of an adjustment is a transition
adjustment (i.e. a change in accounting policy) or a change in estimate, it must treat that
portion as a change in accounting estimate. [IFRS 1.IG58B, IAS 8.32-40]. The distinction
between changes in accounting policies and changes in accounting estimates is
discussed in detail in Chapter 3 at 4.2.
Hedge accounting policies under an entity’s previous GAAP might also have included
one or both of the following accounting treatments:
• derivatives were measured at fair value but, to the extent they were regarded as
hedging future transactions, the gain (or loss) arising was reported as a liability (or
asset) such as deferred (or accrued) income;
• realised gains or losses arising on the termination of a previously unrecognised
derivative used in a hedge relationship (such as an interest rate swap hedging a
borrowing) were included in the statement of financial position as deferred or
accrued income and amortised over the remaining term of the hedged exposure.
In all cases, an entity is required to eliminate deferred gains and losses arising on
derivatives that were reported in accordance with previous GAAP as if they were assets
or liabilities. [IFRS 1.B4(b)]. In contrast to adjustments made to restate derivatives at fair
value, the implementation guidance does not specify in general terms how to deal with
adjustments to eliminate deferred gains or losses, i.e. whether they should be taken to
retained earnings or a separate component of equity.
The requirement to eliminate deferred gains and losses does not appear to extend to
those that have been included in the carrying amount of other assets or liabilities that
will continue to be recognised under IFRSs. For example, under an entity’s previous
GAAP, the carrying amount of non-financial assets such as inventories or property, plant
and equipment might have included the equivalent of a basis adjustment (i.e. hedging
gains or losses were considered an integral part of the asset’s cost). Of course, entities
should also consider any other provisions of IFRS 1 that apply to those hedged items,
e.g. whether any of the exemptions such as those for business combinations (see 5.2
below) or deemed cost (see 5.5 below) will be used.
The following diagram illustrates the treatment of hedge accounting in the opening
IFRS statement of financial position and subsequent periods. Hedge accounting in
the opening IFRS statement of financial position will be discussed in the sub-
sections following the diagram and hedge accounting after transition to IFRSs is
dealt with at 4.6 below.
First-time
adoption
239
Hedge relationship, which still
exists, designated (under previous
GAAP or IFRS) on or before the
date of transition to IFRS?
(IFRS1.B6 and IG 60)
Yes
No
Is the hedge
Hedge is not reflected
relationship of a TYPE
in the opening IFRS
that qualifies for
statement of financial
hedge accounting
position.
which consists only of
eligible hedging
instruments and
hedged items?
Yes
No
Did the entity
On transition:
designate a net position
- Fair value hedge (IFRS 1.IG60A)
as a hedged item in
- Cash flow hedge (IFRS 1.IG60B)
accordance with
-When the hedging instrument is no longer
previous GAAP?
outstanding there is no requirement to restate
when under previous GAAP its result has been
(IFRS 1.B5)
recognized in profit or loss and not deferred.
Yes
No
After transition:
Entity may designate on or
Hedge is not
Are the qualifying criteria,
before the date of transition to
reflected in the
including designation,
IFRS an individual item within
opening IFRS
documentation and
the net position as a hedged
statement of
effectiveness for hedge
item or a net position that meets
financial position.
accounting in paragraph
the requirements in paragraph
6.4.1 of IFRS 9 met?
6.6.1 of IFRS 9.
(IFRS 1.B5)
(IFRS 1.B6)
Follow specific guidance for cash
flow or fair value hedges on
Yes
No
transition and subsequently.
(IFRS 1.B5)
Follow specific hedge
Apply paragraphs 6.5.6 and
accounting guidance
6.5.7 of IFRS 9 to
in IFRS 9
prospectively discontinue
hedge accounting.
(IFRS 1.B6)
240 Chapter
5
4.5.2
Hedge relationships reflected in the opening IFRS statement of
financial position
The standard states that a first-time adopter must not reflect a hedging relationship in
its opening IFRS statement of financial position if that hedging relationship is of a type
that does not qualify for hedge accounting under IFRS 9, which consists only of eligible
hedging instruments and eligible hedged items in paragraph 6.4.1(a). As examples of this
it cites many hedging relationships where the hedging instrument is a stand-alone
written option or a net written option; or where the hedg
ed item is a net position in a
cash flow hedge for another risk other than foreign currency risk. [IFRS 1.B5]. Previous
GAAP hedge documentation and effectiveness that were not fully compliant with the
criteria in paragraph 6.4.1(b)-(c) of IFRS 9 do not mean that the hedge relationship is of
a type that does not qualify for hedge accounting under IFRS 9 (See 4.6 below for
requirements for post transition date hedge accounting).
However, if an entity designated a net position as a hedged item under its previous
GAAP, it may designate as a hedged item under IFRS an individual item within that net
position, or a net position that meets the requirements in paragraph 6.6.1 of IFRS 9,
provided that it does so no later than the date of transition to IFRSs. [IFRS 1.B5]. In other
words, such designation could allow the hedge relationship to be reflected in the
opening IFRS statement of financial position.
On the other hand, a hedge relationship designated under an entity’s previous GAAP
should be reflected in its opening IFRS statement of financial position if that hedging
relationship consists of eligible hedging instruments and eligible hedged items in
paragraph 6.4.1(a), regardless of whether or not the hedge designation, documentation
and effectiveness for hedge accounting under IFRS 9 (paragraph 6.4.1 (b)-(c)) are met on
the transition date. [IFRS 1.B4-B6, IG60A-60B].
4.5.2.A Prohibition
on
retrospective designation
A first-time adopter is not permitted to designate hedges retrospectively in relation to
transactions entered into before the date of transition to IFRSs. [IFRS 1.B6]. Instead it must
apply the requirements prospectively.
In the basis for conclusions, it is explained that:
‘it is unlikely that most entities would have adopted IAS 39’s criteria for
(a) documenting hedges at their inception and (b) testing the hedges for
effectiveness, even if they intended to continue the same hedging strategies after
adopting IAS
39. Furthermore, retrospective designation of hedges (or
retrospective reversal of their designation) could lead to selective designation of
some hedges to report a particular result.’ [IFRS 1.BC75].
While the IASB referred to IAS 39’s criteria in the basis for conclusion quoted above,
it has since reinforced the basis for conclusion when it issued IFRS 9, which says
the following:
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 48
