IFRS 9 Financial Instruments
This new edition also covers the accounting treatment of special derivatives situations, such as raising financing through commodity-linked loans, derivatives on own shares and convertible bonds. Cases are used extensively throughout the book, simulating a specific hedging strategy from its inception to maturity following a common pattern. Coverage includes instruments such as forwards, swaps, cross-currency swaps, and combinations of standard options, plus more complex derivatives like knock-in forwards, KIKO forwards, range accruals, and swaps in arrears. Where assets are measured at fair value, gains and losses are either recognised entirely in profit or loss (fair value through profit or loss, FVTPL), or recognised in other comprehensive income (fair value through other comprehensive income, FVTOCI).
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[IFRS 9, paragraph 4.1.1] If certain conditions are met, the classification of an asset may subsequently need to be reclassified. Under IFRS, derivatives that do not qualify for hedge accounting may significantly increase earnings volatility. Compliant application of hedge accounting requires expertise across both the standards and markets, with an appropriate balance between derivatives expertise and accounting knowledge. This book helps bridge the divide, providing comprehensive IFRS coverage from a practical perspective. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
What you should know about hedge accounting
Amendments to establish the portfolio-layer method for hedges of financial assets in a closed portfolio. But more recently, the changes have been focused on reducing operational burden, expanding the circumstances in which hedge accounting is permissible and better reflecting risk management practices. An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably available at the reporting date).
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Note that derivatives that are used as economic hedges but are not designated in qualifying hedging relationships require special consideration for financial reporting purposes. Finally, some derivatives are entered into for speculative purposes and are not part of a risk mitigation strategy. IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications – those measured at amortised cost and those measured at fair value. Accounting for Derivatives explains the likely accounting implications of a proposed transaction on derivatives strategy, in alignment with the IFRS 9 standards. Written by a Big Four advisor, this book shares the author’s insights from working with companies to minimise the earnings volatility impact of hedging with derivatives. This second edition includes new chapters on hedging inflation risk and stock options, with new cases on special hedging situations including hedging components of commodity risk.
- DTTL (also referred to as “Deloitte Global”) does not provide services to clients.
- The impairment model in IFRS 9 is based on the premise of providing for expected losses.
- These materials were downloaded from PwC’s Viewpoint (viewpoint.pwc.com) under license.
- Deloitte’s Roadmap Hedge Accounting provides an overview of the FASB’s authoritative guidance on hedge accounting as well as our insights into and interpretations of how to apply that guidance in practice.
Derivative instruments and the related accounting guidance and their financial reporting considerations are complex. We have developed this guide to provide a high-level overview of the accounting for, financial statement presentation and disclosure of derivative instruments. Accounting Standards Codification (ASC) 815, Derivatives and Hedging, provides the authoritative guidance for the areas covered by this guide. The classification of a financial asset is made at the time it is initially recognised, namely when the entity becomes a party to the contractual provisions of the instrument.
12-month expected credit losses represent the lifetime cash shortfalls that will result if a default occurs in the 12 months after the reporting date, weighted by the probability of that default occurring. On 24 July 2014, the IASB issued the final version of IFRS 9 incorporating a new expected loss impairment model and introducing limited amendments to the classification and measurement requirements for financial assets. This version supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements).
The application of both approaches is optional and an entity is permitted to stop applying them before the new insurance contracts standard is applied. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI and any remaining gain or loss is hedge ineffectiveness that is recognised in profit or loss. For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option is elected. Whilst for equity investments, the FVTOCI classification is an election.
Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International. Using Q&As and examples, we provide interpretive guidance on derivatives and hedging. This October 2023 edition includes guidance on evaluating whether an embedded feature is bifurcated, amendments related to portfolio-layer method hedging, and other interpretations based on frequent questions we experience in practice. In November 2019, the FASB issued a proposed ASU of Codification improvements to hedge accounting.
Furthermore, the requirements for reclassifying gains or losses recognised in other comprehensive income are different for debt instruments and equity investments. On 28 October 2010, the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities, and carrying over from IAS 39 the requirements for derecognition of financial assets and financial liabilities. Deloitte’s Roadmap Hedge Accounting provides an overview of the FASB’s authoritative guidance on hedge accounting as well as our insights into and interpretations of how to apply that guidance in practice. For guidance on the identification, classification, measurement, and presentation and disclosure of derivative instruments, including embedded derivatives, see Deloitte’s Roadmap Derivatives.
Our latest On the Radar article breaks down high-level hedge accounting questions to help you understand where ASC 815 requirements fit into your financial picture and how to fulfill them. The impairment model in IFRS 9 is based on the premise of providing for expected losses. Assessing the cash flow characteristics also includes an analysis of changes in the timing or in the amount of payments. It is necessary to assess whether the cash flows before and after the change represent only repayments of the nominal amount and an interest rate based on them. The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements). IFRS 9 is set to replace IAS 39, and many practitioners will need to adjust their accounting policies and hedging strategies to conform to the new standard.
