Mar
Apr
May
...
Dec
Total
Notional amount of
coffee futures contracts
(in lb thousands) by
month of their maturity
1,275
1,425
1,350
1,312.5
1,350
...
1,200
16,275
Average hedged rate (in
US
cents
per
lb)
122 125 128 133 135
... 139 133
Financial instruments: Hedge accounting 4145
Disclosure of the profile of nominal amounts of hedging instruments and their average prices,
as required by paragraph 23B of IFRS 7, would not be very meaningful when an entity applies
a dynamic hedging process in which both the amount of hedged item and hedging instrument
change frequently. [IFRS 7.23B, BC35Z]. Consequently, an entity using a dynamic hedging process
is exempt from providing these disclosures. Instead, such an entity must disclose:
• a description of what the ultimate risk management strategy is in relation to those
dynamic hedging relationships;
• a description of how it reflects this risk management strategy by using hedge
accounting and designating those particular hedging relationships; and
• an indication of how frequently the hedging relationships are discontinued and
restarted as part of the entity’s process in relation to those hedging relationships.
[IFRS 7.23C].
If, at the reporting date, the volume of hedging relationships (which is part of the
disclosures discussed at 10.4 below) to which the above exemption applies is not
representative of the normal volumes hedged during the period, an entity has to disclose
this fact and the reason it believes the volumes are not representative. [IFRS 7.24D].
10.4 The effects of hedge accounting on the financial position and
performance
IFRS 7 sets out a specific requirement to disclose the effect hedge accounting has on the
entity’s financial position and performance. All disclosures are required to be provided
in a tabular format and by type of risk. [IFRS 7.24A-24C].
Instead of reproducing the specific requirements of IFRS 7 (see Chapter 50 at 4.3.2) we
provide examples below of how those disclosures might look.
Example 49.87: Illustrative disclosure of the effects of hedge accounting on the
financial position and performance
The impact of hedging instruments designated in hedging relationships as of 31 December 2019 on the
statement of financial position of Alpha Beta Coffee Group (the Group) is as follows:
Cash flow hedges
Notional
Carrying
Line item in the
Change in fair value used for
amount
amount
statement of
measuring ineffectiveness for the
financial position
period
Coffee price risk
Short-term
Arabica coffee futures
16,275lbs
derivative financial
(thousands)
(4.5)
liabilities
(1.0)
Interest rate risk
Pay fixed/receive
Long-term
variable interest rate
derivative financial
swap
EUR 50m
4.0
assets
1.0
Fair value hedges
Notional
Carrying
Line item in the
Change in fair value used for
amount
amount
statement of
measuring ineffectiveness for the
financial position
period
Interest rate risk
Receive fixed/pay
Long-term
variable interest rate
derivative financial
swap
EUR 200m
(10.0)
liabilities
(2.0)
4146 Chapter 49
The impact of hedged items designated in hedging relationships as of 31 December 20x0 on the statement of
financial position of the Group is as follows:
Cash flow hedges
Change in value used for
Cash flow hedge reserve
measuring
ineffectiveness
Coffee price risk
Coffee purchases
1.0
4.5
Interest rate risk
Forecast interest
payments
(0.9)
(3.9)
Fair value hedges
Carrying
Thereof
Line item in the
Change in fair value
amount
accumulated
statement of financial
used for measuring
fair value
position
ineffectiveness for the
adjustments
period
Interest rate risk
Fixed rate borrowings
211.0
11.0
Long-term borrowings
2.1
The above hedging relationships affected profit or loss and other comprehensive income as follows:
Cash flow hedges
Hedging gain
Ineffectiveness
Line item
Amount
Line item in
or loss
recognised in
in the statement
reclassified
the statement
recognised in
profit or loss
of profit or loss
from OCI to
of profit or
OCI
for
profit or loss
loss for
ineffectiveness
reclassification
Coffee price risk
Hedges of forecast
coffee purchases
(1.0)
Interest rate risk
Other financial
Forecast interest
income
Interest
payments
0.9
0.1
0.5
expense
Fair value hedges
Ineffectiveness recognised in
Line item in the statement of
profit or loss
profit or loss for ineffectiveness
Interest rate risk
Hedge of fixed rate
borrowings
(0.1)
Other financial expenses
Note that the cash flow hedges of the coffee price risk result in an adjustment to the
purchase price of the coffee purchases (a basis adjustment), which means that the
amounts that are removed from the cash flow hedge reserve are not reclassification
adjustments and hence do not affect OCI or profit or loss (see 9.1 above).
IFRS 7 further requires a reconciliation of the components of equity that arise in
connection with hedge accounting (such as the hedging reserve) and an analysis of OCI.
That information needs to be disaggregated by risk category, which can be given in the
notes to the financial statements. [IFRS 7.24E, 24F].
Financial instruments: Hedge accounting 4147
11 MACRO
HEDGING
At a detailed level, the topic of portfolio (or macro) hedging for banks and similar
fin
ancial institutions is beyond the scope of a general financial reporting publication
such as this. However, no discussion of hedge accounting would be complete without
an overview of the high level issues involved and an explanation of how the standard
setters have tried to accommodate these entities.
Financial institutions, especially retail banks, usually have as a core business the
collection of funds by depositors that are subsequently invested as loans to customers.
This typically includes instruments such as current and savings accounts, deposits and
borrowings, loans and mortgages that are usually accounted for at amortised cost. The
difference between interest received and interest paid on these instruments (i.e. the net
interest margin) is a main source of profitability.
A bank’s net interest margin is exposed to changes in interest rates, a risk most banks
(economically) hedge by entering into derivatives (mainly interest rate swaps). Applying
the hedge accounting requirements as set out in IFRS 9 (or IAS 39) to such hedging
strategies on an individual item-by-item basis can be difficult as a result of the
characteristics of the underlying financial assets and liabilities:
• Prepayment options are common features of many fixed rate loans to customers.
Customers exercise these options for many reasons, such as when they move house,
and so not necessarily in response to interest rate movements. Their behaviour can
be predicted better on a portfolio basis rather than an item-by-item basis.
• As a result of the sheer number of financial instruments involved, banks typically
apply their hedging strategies on a macro (or portfolio), dynamic basis, with the
number of individual instruments in the hedged portfolio constantly churning.
IAS 39 includes some specific guidance originally designed with macro hedging in mind.
Currently some of this guidance can still be applied even when IFRS 9 is applied (see 11.2
below). The IAS 39 macro hedging guidance exists for portfolio fair value, [IAS 39.81A, 89A,
AG114-132], and cash flow hedge accounting, [IAS 39 IG.F.6.1-F.6.3], for interest rate risk.
However, banks did not always use the IAS 39 macro hedge accounting solutions. This is
because: not all sources of interest rate risk qualify for hedge accounting, the use of IAS 39
can be operationally complex and cash flow hedge solutions result in volatility of other
comprehensive income. Some European banks, instead, made use of the European
Union’s carve out of certain sections of the IAS 39 hedge accounting rules.
The accounting for macro hedging was originally part of the IASB’s project to replace
IAS 39 with IFRS 9. However, the IASB realised that developing the new accounting
model would take time and probably be a different concept from hedge accounting. In
May 2012, the Board therefore decided to decouple the part of the project that is related
to accounting for macro hedging from IFRS 9, allowing more time to develop an
accounting model without affecting the timeline for the completion of the other
elements of IFRS 9.22 This separate project is referred to as Accounting for Dynamic
Risk Management. The status of the project is discussed at 11.1 below.
4148 Chapter 49
11.1 Accounting for dynamic risk management
In April 2014, the IASB issued the Discussion Paper – Accounting for Dynamic Risk
Management: a Portfolio Revaluation Approach to Macro Hedging. Most respondents
supported the need for the project, but there was no consensus on a solution. Given the
diversity in views, in July 2015 the IASB concluded that the insights that it had received
from the comment letters and feedback so far did not enable it to develop proposals for
an exposure draft. Accordingly, the IASB decided that the project should remain in the
research programme, with the aim of publishing a second discussion paper, most likely
with a new accounting model, without further developing the Portfolio Revaluation
Approach to Macro Hedging.
Following a number of education sessions on dynamic risk management in early 2017,
at its November 2017 meeting the IASB began developing a new accounting model for
the recognition and measurement for dynamic risk management. The aim of the model
is to faithfully represent, in the financial statements, the impact of risk management
activities of a financial institution in the area of dynamic risk management rather than
perfectly capture every aspect of the risk management activity. It has been tentatively
agreed that because accounting for the interest rate risk management activities of
financial institutions is where the greatest need arises, any accounting model developed
will be based on that scenario.
Through the various IASB meetings since November 2017, the model has been
developed recognising that interest rate risk management activities of financial
institutions focus on achieving a particular net interest margin profile. At a high level,
the model being developed requires the identification of the financial assets that are
managed as part of the dynamic risk management. Then in consideration of the financial
liabilities also included within dynamic risk management, and the financial institution’s
risk management strategy, a target asset profile is determined.
The target asset profile is a hypothetical asset portfolio that would deliver the desired
net interest margin profile, consistent with the financial institution’s risk management
strategy, in combination with the actual financial liabilities included within dynamic risk
management. The target profile would be an amount equal to the actual asset portfolio,
although the tenor of the assets within the target portfolio would differ in most cases.
The target asset profile will then be used for comparison purposes to determine the
extent to which the actual risk management activity achieved the desired net interest
income profile.
The IASB have discussed various eligibility criteria for application of the new model,
including criteria for eligible financial assets, liabilities and risk management derivatives.
These criteria are too detailed for this discussion.
At the time of writing the model was still in development and only tentative decisions
have been taken thus far. It is worth noting that although any measurement or
assessment requirements of the model are outstanding at the time of writing, it has been
tentatively concluded that the cash flow hedge mechanics will be used as a basis to
account for the dynamic risk management (see 7.2 above).
The IASB plans to publish a second discussion paper in 2019.
Financial instruments: Hedge accounting 4149
11.2 Applying hedge accounting for macro hedging strategies under
IFRS 9
Because of its pending project on an accounting model specifically tailored to macro
hedging situations (see 11.1 above), the IASB created a scope exception from the IFRS 9
hedging accounting requirements that allows entities to use the fair value hedge
accounting for portfolio hedges of interest rate risk, and only for such hedges, as defined
and set out in IAS 39, until the project is finalised and becomes effective. [IFRS 9.6.1.3].
The specific guidance that defines what is meant by the fair value hedge accounting for
&nb
sp; portfolios of interest rate risk is set out in IAS 39.81A, 89A, and AG114 toAG132. The
application of this guidance for banks and similar financial institutions is beyond the
scope of a general financial reporting publication such as this and so is not covered
further within this publication.
However, IFRS 9 does not include a similar scope exception for the ‘macro’ cash flow
hedge accounting set out in the Implementation Guidance to IAS 39, often applied by
financial institutions to interest rate positions for which interest rate risk is managed on
a net basis. [IAS 39 IG.F.6.1-F.6.3]. The IASB are of the view that as the macro cash flow
hedge accounting model is an application of the general hedge accounting model under
IAS 39, the macro cash flow hedge accounting model should remain an application of
the IFRS 9 hedge accounting guidance. Accordingly the IASB did not want to make an
exception for the macro cash flow hedge accounting approach and so decided to retain
an earlier decision not to carry forward any IAS 39 implementation guidance on hedge
accounting to IFRS 9. [IFRS 9.BC6.91-95].
However, many financial institutions were concerned that their understanding of the
IAS 39 macro cash flow hedge accounting model was not totally consistent with IFRS 9
and that they would not be able to continue with their existing macro cash flow hedging
strategies under IFRS 9.
In its January 2013 meeting, the IASB confirmed its earlier decision and clarified that
not carrying forward the implementation guidance was without prejudice (i.e. it did not
mean that the IASB had rejected that guidance and so had not intended to imply that
entities cannot apply macro cash flow hedge accounting under IFRS 9).23
This was, however, not the end of the story. Several constituents continued to lobby
EFRAG and the IASB to allow entities to either apply the hedge accounting requirements
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 822
