IFRS Implementation Guide: An Overview of the New Hedging Requirements of IFRS 9 Financial Instruments

Category: IFRS

IFRS Implementation Guide: An Overview of the New Hedging Requirements of IFRS 9 Financial Instruments

In July 2014, the International Accounting Standards Board (IASB) issued the final version of IFRS 9 Financial Instruments. including the new hedge accounting requirements first published in November 2013. The final hedge accounting requirements are unchanged from their previous version except to reflect the addition of the fair value through other comprehensive income (FVOCI) measurement category. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement, and is effective for annual periods beginning on or after January 1, 2018. Earlier application is permitted.

When IAS 39 was drafted, hedging activities were relatively new and not as widely understood; hence, many financial statements users believe that IAS 39 does not adequately reflect an entity’s risk management practices in their financial reporting. As a result, the IASB undertook a fundamental overhaul of hedge accounting in formulating IFRS 9.

The new hedge accounting model aims to provide greater cohesion between an entity’s risk management strategy, their objectives for entering into hedging transactions and relationships, and the final impact of hedging on their financial statements. Improved disclosures are provided with the new model regarding the effect of hedge accounting on an entity’s financial statements and risk management strategy as well as details about derivatives entered into and their impact on an entity’s future cash flows.

This guide highlights the key differences between the IAS 39 and IFRS 9 hedge accounting models. It also provides an overview of the requirements and illustrative examples to assist in the application of the new IFRS 9 hedging model.