instead, OCI. There is no change to the accounting for the hedged item and the gain or
loss on the hedging instrument is recognised in OCI (see 2.6.3 and 7.1.1 above).
[IFRS 9.6.5.8].
4140 Chapter 49
9.3
Hedges of groups of items
9.3.1
Cash flow hedges
The designation of a group of items within a cash flow hedge, has no effect on the
presentation in profit or loss of those designated hedged items. However, the presentation
of the related hedging gains or losses in the statement of profit or loss depends on the nature
of the group position. [IFRS 9.B6.6.13-15]. The required presentation for hedges of groups of
items is discussed in more detail in Chapter 50 at 7.1.3, and is summarised in the table below.
Figure 49.4:
Presentation for a hedge of groups of items
Nature of position
Line items affected in
Presentation in the income statement
profit or loss
One line item
The amount reclassified from equity to profit or loss has to be
presented in the same line item as the underlying hedged transaction.
Multiple line items
The amount reclassified from equity to profit or loss has to be
Gross position
allocated to the line items affected by the hedged items on a
systematic and rational basis and shall not result in a gross up
of the net gains or losses on the hedging instrument.
Net position
Multiple line items
The amount reclassified from equity to profit or loss has to be
presented in a separate line item.
Note that the designation of a net position cash flow hedge is only permitted when
hedging foreign currency risk (see 2.5.3 above).
For net position cash flow hedges, as the hedging gains and losses will be presented in a
different line to that which the hedged items are presented in profit or loss, such a hedge
designation might not seem very attractive, as the presentation of the hedged transactions
will not reflect the effect of the hedge. However, the Board was concerned that grossing-
up the hedging gain or loss would result in non-existing gains or losses being recognised
in the statement of profit or loss, which would be in conflict with general accounting
principles. [IFRS 9.BC6.457]. The Board also considered that such a presentation makes it
transparent that an entity is hedging on a net basis and would clearly present the effect of
those hedges of net positions on the face of the statement of profit or loss. [IFRS 9.BC6.461].
However because of this presentation, in practice some entities may choose to continue
to designate a proportion of a gross position rather than a net designation. Such a ‘proxy
designation’ would be permitted provided the designation is directionally consistent with
the actual risk management activities. [IFRS 9.BC6.98, BC6.100(a)]. (See 6.2.1 above).
9.3.2
Fair value hedges
A special presentation in the income statement is prescribed for fair value hedges of
groups of items with offsetting risk positions (i.e. hedges of a net position), whose
hedged risk affects different profit or loss line items. Entities must present the hedging
gains or losses of such a hedge in a separate line item in the income statement in order
to avoid grossing up the hedging gain or loss on a single instrument into multiple line
items. Hence in that situation the amount in the line item that relates to the hedged item
itself remains unaffected. [IFRS 9.6.6.4, B6.6.16].
Financial instruments: Hedge accounting 4141
However, the treatment in the statement of financial position is different, in that the
individual items in the group are separately adjusted for the change in fair value due to
changes in the hedged risk. [IFRS 9.6.6.5].
9.4
Costs of hedging
When applying the costs of hedging accounting to the time value of an option contract,
the forward element of a forward contract or the foreign currency basis spread the
treatment for the amount accumulated in a separate component of equity is dependent
on the nature of the underlying hedged item (see 7.5 above).
For transaction related hedges:
• If the hedged item subsequently results in the recognition of a non-financial asset
or liability, or a firm commitment for a non-financial asset or liability for which fair
value hedging will be applied, the amount accumulated in a separate component
of equity is removed from equity and included directly in the carrying amount of
the asset or liability. This is not a reclassification adjustment, and so does not affect
OCI of the period.
• For other transaction related hedging relationships (such as the hedge of highly
probable forecast sales), the amount accumulated in a separate component of
equity is be reclassified to profit or loss as a reclassification adjustment in the same
period or periods during which the hedged expected future cash flows affect profit
or loss. This is a reclassification adjustment, and so does affect OCI of the period.
• If all or a portion of the amount accumulated in a separate component of equity is
not expected to be recovered, the amount that is not expected to be recovered is
immediately reclassified into profit or loss. This is a reclassification adjustment,
and so does affect OCI of the period. [IFRS 9.6.5.15(b)].
For time-period related hedges, the cost of hedging amount at the date of designation as
a hedging instrument is be amortised on a systematic and rational basis over the period
during which the hedged item impacts profit or loss (see 7.5.1 above). The ‘cost of hedging’
in this context is the time value of an option contract, the forward element of a forward
contract or the foreign currency basis spread, to the extent that it relates to the hedged
item, (see 7.5.1.A above). However, if the hedge relationship is discontinued, the net
amount remaining in OCI (i.e. including cumulative amortisation) is immediately
reclassified into profit or loss. Both of these are reclassification adjustments, and so do
affect OCI of the period. [IFRS 9.6.5.15(c)]. The standard is however silent on where in profit
or loss the costs of hedging accumulated in OCI should be recycled.
10 DISCLOSURES
For a comprehensive overview of the financial instruments related disclosure
requirements of IFRS 7 see Chapter 50. This section on disclosures only addresses some
of the hedge accounting related disclosures and aims primarily at illustrating them.
4142 Chapter 49
10.1 Background and general requirements
In July 2014, the IASB published a substantially final version of IFRS 9. At the same time
the IASB also made a number of consequential amendments to IFRS 7 which were
effective for periods beginning on or after 1 January 2018. It is worth noting that the
revised IFRS 7 disclosures must be applied for periods beginning on or after 1 January
2018, even if an entity makes the accounting policy choice to continue to apply IAS 39
hedge accounting, as discussed in 1.3 above.
In the development of the revised standard, many constituents, users in particular, asked
for improved disclosures that link more clearly an entity’s risk man
agement activities
and how it applies hedge accounting. [IFRS 7.BC35C]. Linking the two requires an
understanding of an entity’s risk management strategy, which is why the IASB
introduced a requirement for a much more detailed qualitative description of the risk
management strategy of the entity (see 6.2 above). [IFRS 7.BC35P]. These disclosures of risk
management strategies will, however, only be required where hedge accounting is
applied. [IFRS 7.21A].
The objective of the revised hedge accounting disclosures is that entities must disclose
information about:
• the risk management strategy and how it is applied to manage risks;
• how the risk management activities may affect the amount, timing and uncertainty
of future cash flows; and
• the effect that hedge accounting has had on the statement of financial position, the
statement of comprehensive income and the statement of changes in equity.
[IFRS 7.21A].
In applying this objective an entity has to consider the necessary level of detail, the
balance between different disclosure requirements, the appropriate level of
disaggregation and whether additional explanations are necessary to meet the
objective. [IFRS 7.21D].
The hedge accounting disclosures should be presented in a single note or a separate
section of the financial statements. An entity may include information by cross-
referencing to information presented elsewhere, such as in a risk report, provided that
information is available to users of the financial statements on the same terms as the
financial statements and at the same time. [IFRS 7.21B].
The IASB have made it clear that it requires entities to give clear disclosures about their
risk management activities. [IFRS 7.BC35D]. These should be specific to the entity rather
than generic or ‘boiler plate’.
10.2 Risk management strategy
The risk management strategy has to be described, by type of risk, and this description
has to include how each risk arises and how, and to what extent, the risk is managed.
This description must also include whether the entity hedges only a part of the risk
exposure, such as a nominal component or selected contractual cash flows. [IFRS 7.22A].
To satisfy this requirement, an entity must disclose:
Financial instruments: Hedge accounting 4143
• the hedging instruments and how they are used to hedge the risk exposure;
• why the entity believes there is an economic relationship between the hedged item
and the hedging instrument;
• how the hedge ratio is determined; and
• the expected sources of ineffectiveness. [IFRS 7.22B].
When only a risk component of an exposure is hedged, an entity must also disclose how it
determined the component and how the component relates to the item in its entirety
(see 2.2 above). [IFRS 7.22C]. In our view this would include a description of whether the risk
component is contractually specified, and if not, how the entity determined that the non-
contractually specified risk component is separately identifiable and reliably measurable.
Example 49.85: Illustrative disclosure of risk management strategy for
commodity price risk
Coffee price risk
Fluctuations in the coffee price are the main source of market risk for the Alpha Beta Coffee Group (the Group).
The Group purchases Arabica coffee from various suppliers in South America. For this purpose, the Group enters
into long-term contracts (for between one and three years) with its suppliers, in which the future coffee price is
indexed to the USD Arabica benchmark coffee price, adjusted for transport cost that are indexed to diesel prices
plus a quality coefficient that is reset annually for a crop period. In order to secure the volume of coffee needed,
supply contracts are always entered into (or renewed) at least one year prior to harvest.
The Group forecasts the monthly volume of expected coffee purchases for a period of 18 months and manages
the coffee price risk exposure on a 12-month rolling basis. For this purpose, the Group enters into futures
contracts on the Arabica benchmark price and designates the futures contracts in cash flow hedges of the
USD Arabica benchmark price risk component of its future coffee purchases. Some of those purchases are
committed minimum volumes under the contracts and some purchases are highly probable forecast
transactions (i.e. quantities in excess of the minimum purchases volumes and sometime for periods for which
no contract has yet been entered into). The underlying risk of the coffee futures contracts is identical to the
hedged risk component (i.e. the USD Arabica benchmark price). Therefore, the Group has established a hedge
ratio of 1:1 for all its hedging relationships. The USD Arabica benchmark price risk component is
contractually specified in its purchase contracts, therefore, the Group considers the risk component to be
separately identifiable and reliably measurable based on the price of coffee futures.
The Group does not hedge its exposure to the variability in the purchase price of coffee that results from the
annual reset of the quality coefficient, because hedging that risk would require highly bespoke financial
instruments that in the Group’s view are not economical.
The Group’s exposure to the variability in the purchase price of coffee that results from the diesel price
indexation of the transport costs is integrated into its general risk management of logistics costs that
aggregates exposures resulting from various logistics processes of the Group (see XYZ below).
The Group determined the USD Arabica benchmark coffee price risk component that it designates as the
hedged item on the basis of the pricing formula in the Group’s coffee supply contracts (see the above
description). That benchmark component is the largest pricing element. The quality coefficient depends on
the particular crop in the region from which the Group sources its coffee, depending mainly on weather
conditions that affect size and quality of the crop. Sometimes pest and plant diseases can have similar effects.
Over the last 10 crop periods the quality coefficient ranged between US cents 2-27 per pound (lb). For the
effect of the diesel price indexation, refer to the section ‘Logistics costs management’ in the Risk
Management Report that is included in this Annual Report.
More information about how the Group manages its risk, including the extent to which the Group hedges, the
hedging instruments used and sources of ineffectiveness, is provided in the Risk Management Report (see
section ‘Commodity Price Risk Management’).
4144 Chapter 49
The risk management strategy disclosures are an important cornerstone of the new
hedge accounting model, as they provide the link between an entity’s risk management
activities and how they affect the financial statements. The notes should also disclose
the key judgements the entity has used in applying the new hedge accounting model
(including those used to determine whether an economic relationship exists between
the hedged item and the hedging instrument, how the hedge ratio was set and how risk
components were identified, just to mention a few) (see 6.4.1, 6.4.3 and 2.2 above).
Disclosures have to be made by type of risk, rather than the type of hedging relationship
(e.g. cash flow hedge
or fair value hedge). [IFRS 7.21C]. This should enable users to follow
the various disclosures by type of risk, resulting in a much better understanding of the
hedging activities and their impact on the financial statements.
10.3 The amount, timing and uncertainty of future cash flows
Further to the risk management strategy, entities have to disclose the ‘terms and
conditions of hedging instruments and how they affect the amount, timing and
uncertainty of future cash flows’. [IFRS 7.23A]. More precisely, an entity has to disclose,
by category of risk:
• a profile of the timing of the nominal amount of the hedging instrument; and
• if applicable, the average price or rate of the hedging instrument. This could be a
strike price or a forward rate. [IFRS 7.23B].
In the Exposure Draft, the IASB proposed also to require the disclosure of the total
volume of risk the entity managed, irrespective of whether the entity actually hedges
the full exposure. [IFRS 7.BC35U]. Many constituents disagreed with this proposal as they
believed this to result in disclosure of commercially sensitive information. [IFRS 7.BC35W].
The Board acknowledged this concern and decided not to carry this requirement
forward to the final standard. [IFRS 7.BC35X].
Entities also have to disclose a description of the sources of hedge ineffectiveness that
are expected to affect the hedging relationship during its term (see 7.4.1 above).
[IFRS 7.23D]. This would include an update of new sources of ineffectiveness that emerge
in a hedging relationship over the term. [IFRS 7.23E].
Finally, if an entity has previously designated forecast transactions as hedged items in a
cash flow hedging relationship and these are no longer expected to occur, this fact and a
description of the forecast transaction have to be disclosed (see 8.3.2 above). [IFRS 7.23F].
Example 49.86: Illustrative disclosure of timing, nominal amount and average
price of coffee futures contracts
As of 31 December 2019, Alpha Beta Coffee Group is holding the following coffee futures contracts to hedge
the exposure on its coffee purchases over the next twelve months:
Jan
Feb
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 821
