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IFRS 9 hedge accounting

The IASB has published Chapter 6 ‘Hedge Accounting’ of IFRS 9 ‘Financial Instruments’. The new requirements look to align hedge accounting more closely with entities’ risk management activities by:

  • increasing the eligibility of both hedged items and hedging instruments
  • introducing a more principles-based approach to assessing hedge effectiveness.

As a result, the new requirements should serve to reduce profit or loss volatility. The increased flexibility of the new requirements are however partly offset by entities being prohibited from voluntarily discontinuing hedge accounting and also by enhanced disclosure requirements. This special edition of IFRS News informs you about the new Standard, and the benefits and challenges that adopting it will bring.

IAS 39 ‘Financial Instruments: Recognition and Measurement’, the previous Standard that dealt with hedge accounting, was heavily criticised for containing complex rules which either made it impossible for entities to use hedge accounting or, in some cases, simply put them off doing so.

We therefore welcome the publication of IFRS 9’s requirements on hedge accounting. The new requirements should make it easier for many entities to reflect their actual risk management activities in their hedge accounting and thus reduce profit or loss volatility.

At the same time, entities should be aware that while it will be easier to qualify for hedge accounting, many of the existing complexities associated with it (measuring hedge ineffectiveness, etc) will continue to apply once entities are using it.