International Financial Reporting Standard 9

Financial Instruments

Session - 2

Introduction
IFRS 9 Financial Instruments (IFRS 9) was developed by the International Accounting
Standards Board (IASB) to replace IAS 39 Financial Instruments: Recognition and
Measurement (IAS 39).

▪ IFRS 9 incorporates the requirements of all three phases of the IASB’s financial
instruments project, being:

3
Hedge
Accounting

Effective date

The effective date of IFRS 9 is for annual reporting periods beginning on or after
1 January 2018. Early adoption is permitted.
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 Chapter 1 Chapter 2 Chapter 3
Objective Recognition and
Scope
derecognition

Chapter 4 Chapter 6
Chapter 5
Classification Measurement Hedge accounting

Objective

The objective of this Standard is to establish principles for the financial reporting of
financial assets and financial liabilities that will present relevant and useful
information to users of financial statements for their assessment of the amounts,
timing and uncertainty of an entity’s future cash flows.

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 This Standard shall be applied by all entities to all types of financial instruments except:

Interest in subsidiaries IFRS 10/IAS 27

Interests in associates and joint ventures IAS 27, IAS 28

Employer’s rights and obligations under employee benefit plans IAS 19

Insurance contracts (except embedded derivatives and some financial guarantee IFRS 4/IFRS 17
contracts
Financial instruments with discretionary participation features IFRS 4/IFRS 17
Share-based payments IFRS 2
Rights and obligations under leases IFRS 16
An entity’s own equity instruments IAS 32
Financial liabilities issued by an entity that are classified as equity in accordance with IAS 32
IAS 32.16A to 16D
Forward contracts between an acquirer and selling shareholder for a transaction that IFRS 3
meets the definition of a business combination whose terms do not exceed a
reasonable period normally necessary to obtain any required approvals and to
complete the transaction

Loan commitments, other than for the IFRS 9 requirements for impairment and
derecogniton (except those which are designated at FVTPL, can be settled net or
represent a commitment to provide a loan at a below-market interest rate which are
in the scope of IFRS 9 in its entirety).

Reimbursement rights for provisions IAS 37

Financial instruments that represent rights and obligations within the scope of IFRS IFRS 15
15 Revenue from Contracts with Customers, except those which IFRS 15 specifies are
accounted for in accordance with IFRS 9

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 Chapter 3 Recognition and derecognition

Para 3.1 - Initial recognition

Para 3.1.1

An entity shall recognise a financial asset or a financial liability in

its statement of financial position when, and only when, the entity
becomes party to the contractual provisions of the instrument.

▪ When an entity first recognises a financial asset, it shall

classify it in accordance with paragraphs 4.1.1–4.1.5 and
Measure it in accordance with paragraphs 5.1.1–5.1.3.

▪ When an entity first recognises a financial liability, it shall

classify it in accordance with paragraphs 4.2.1 and 4.2.2 and
Measure it in accordance with paragraph 5.1.1.

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 Chapter 4 Classification

Para 4.1 Classification of financial assets

Unless paragraph 4.1.5 applies, an entity shall classify financial assets as

subsequently measured at –

Fair Value Through

Other Fair Value Through
Amortised Cost Comprehensive Or Profit or Loss
Income (FVTOCI) (FVTPL)

on the basis of both:

(a) the entity’s business model for managing the financial assets and

(b) the contractual cash flow characteristics of the financial asset.

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 Para 4.1.2 Amortised Cost

A financial asset shall be measured at amortised cost if both of the following

conditions are met:

a) Business Model Test

The financial asset is held within a business model whose objective is to hold
financial assets in order to collect contractual cash flows and

b) Contractual Cash Flow Test

The contractual terms of the financial asset give rise on specified dates to cash
flows that are Solely Payments of Principal and Interest (SPPI) on the principal
amount outstanding.

Examples of financial instruments that are likely to be classified and accounted for at
amortised cost under IFRS 9 include:

• Loan receivables with ‘basic’ features;

• Investments in government bonds that are not held for trading;
• Investments in term deposits at standard interest rates etc.

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Para 4.1.2A Fair value through other comprehensive income (FVTOCI)

A financial asset shall be measured at fair value through other comprehensive income
(FVTOCI) if both of the following conditions are met:

a) Business Model Test

a) the financial asset is held within a business model whose objective is achieved by
both collecting contractual cash flows and selling financial assets.

And
b) Contractual Cash Flow Test

give rise on specified dates to cash

Examples of financial instruments that may be classified and accounted for at FVOCI
under IFRS 9 include: –

• Investments in government bonds where the investment period is likely

to be shorter than maturity.
• Investments in corporate bonds where the investment period is likely to
be shorter than maturity.
Para 4.1.3 For the purpose of applying paragraphs 4.1.2 (b) and 4.1.2A(b):

a) principal is the fair value of the financial asset at initial recognition.

b) interest consists of consideration for the time value of money, for the credit risk
associated with the principal amount outstanding during a particular period of time
and for other basic lending risks and costs, as well as a profit margin.
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Para 4.1.4 Fair value through profit or loss (FVTPL)

A financial asset shall be measured at fair value through profit or loss (FVTPL)
Unless
it is measured at amortised cost in accordance with paragraph 4.1.2 or
at fair value through other comprehensive income in accordance with paragraph
4.1.2A.

However an entity may make an irrevocable election at initial recognition for particular
investments in equity instruments that would otherwise be measured at fair value
through profit or loss to present subsequent changes in fair value in other
comprehensive income (see paragraphs 5.7.5–5.7.6).

Investments in equity instruments

Para 5.7.5

At initial recognition, an entity may make an irrevocable election to present in other

comprehensive income subsequent changes in the fair value of an investment in an
equity instrument within the scope of this Standard that is neither held for trading
nor contingent consideration recognised by an acquirer in a business combination to
which IFRS 3 applies. (See paragraph B5.7.3 for guidance on foreign exchange gains
or losses.)

Para 5.7.6

If an entity makes the election in paragraph 5.7.5, it shall recognise in profit or loss
dividends from that investment in accordance with paragraph 5.7.1A.

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 Debt Instrument (Loan Notes)

FV through PL FV through OCI Amortised cost

To both collecting
contractual cash flows To collect contractual
All other Instrument and selling financial cash flows (ie. Interest
assets and Principle)

Long Term Long

but not till Term
maturity
Hold + Sell

Sell in
short
term

Timing of cash flow should be fixed

Business Model Test

Cash flow characteristics Test

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 Equity Instrument

Fair Value through Other

Fair Value through profit or loss
Comprehensive Income (FVTOCI)
(FVTPL)

Short Term Intention Long Term Intention

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 Chapter 5 Measurement

5.1 Initial measurement

Para 5.1.1 Except for trade receivables within the scope of paragraph 5.1.3,
At initial recognition,

An entity shall measure a financial asset or financial liability at its fair value plus or
minus, in the case of a financial asset or financial liability not at fair value through profit
or loss,
transaction costs that are directly attributable to the acquisition or issue of the
financial asset or financial liability.

Transaction Costs

Incremental costs that are directly attributable to the acquisition, issue or disposal of a
financial asset or financial liability.
An incremental cost is one that would not have been incurred if the entity had not
acquired, issued or disposed of the financial instrument.

Para 5.1.3

Despite the requirement in paragraph 5.1.1, at initial recognition, an entity shall

measure trade receivables at their transaction price (as defined in IFRS 15) if the
trade receivables do not contain a significant financing component in accordance
with IFRS 15 (or when the entity applies the practical expedient in accordance with
paragraph 63 of IFRS 15).

Transaction Price
The amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected
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on behalf of third parties.
 5.2 Subsequent measurement of financial assets

Para 5.1.1

After initial recognition, an entity shall measure a financial asset in accordance with
paragraphs 4.1.1–4.1.5 at:
a) amortised cost;
b) fair value through other comprehensive income; or
c) fair value through profit or loss.

Para 5.2.2
An entity shall apply the impairment requirements in Section 5.5 to financial
assets that are measured at amortised cost in accordance with paragraph 4.1.2
and to financial assets that are measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A.

Para 5.2.3
An entity shall apply the hedge accounting requirements in paragraphs 6.5.8–
6.5.14 (and, if applicable, paragraphs 89–94 of IAS 39 Financial Instruments:
Recognition and Measurement for the fair value hedge accounting for a portfolio
hedge of interest rate risk) to a financial asset that is designated as a hedged item.

Accounting Treatment:

Fair Value through profit Fair Value through OCI

or loss (FVTPL) (FVTOCI)

1) Initially recorded at FV 1) Initially recorded at cost (FV+TC)

2) Transaction cost : Through PL 2) Transaction cost: Capitalized
3) Subsequent measurement : FV 3) Subsequent measurement: FV
4) FV change taken to PL 4) FV change taken to OCI
5) Interest, dividend, gain or loss on Page 12 of 32 5) Interest, dividend, gain or loss on
disposal taken to - PL disposal taken to - PL
 Reclassification of financial assets

➢ The reclassification is applicable only for Debt Instrument.

➢ Reclassification is needed Due to changes of the business model of the entity.

FVTPL FVTOCI Amortised Cost

If an entity reclassifies financial assets,

➢ it shall apply the reclassification prospectively from the reclassification date.
➢ The entity shall not restate any previously recognised gains, losses
(including impairment gains or losses) or interest.

Amortised cost to FVTPL:

➢ its fair value is measured at the reclassification date.

➢ Any gain or loss arising from a difference between the previous amortised
cost of the financial asset and fair value is recognised in profit or loss.

FVTPL to Amortised Cost

➢ its fair value at the reclassification date becomes its new gross carrying amount.

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Amortised Cost to FVTOCI

➢ its fair value is measured at the reclassification date.

➢ Any gain or loss arising from a difference between the previous
amortised cost of the financial asset and fair value is recognised in other
comprehensive income.
➢ The effective interest rate and the measurement of expected credit
losses are not adjusted as a result of the reclassification.

FVTOCI to Amortised Cost

➢ the financial asset is reclassified at its fair value at the reclassification

date.
➢ However, the cumulative gain or loss previously recognised in other
comprehensive income is removed from equity and adjusted against the
fair value of the financial asset at the reclassification date. As a result, the
financial asset is measured at the reclassification date as if it had always
been measured at amortised cost. This adjustment affects other
comprehensive income but does not affect profit or loss and therefore is
not a reclassification adjustment.

FVTPL to FVTOCI

• the financial asset continues to be measured at fair value.

FVTOCI to FVTPL

➢ the financial asset continues to be measured at fair value.

➢ The cumulative gain or loss previously recognised in other comprehensive
income is reclassified from equity to profit or loss as a reclassification
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adjustment at the reclassification date.
 Derecognition of Financial Assets

Derecognition is the removal of a previously recognised financial asset or financial

liability from an entity’s statement of financial position.

Right to received cash

Exercise Transfer Lapse

Bank (Dr.) P/L (Dr.)

Financial Assets (Cr.) Financial Assets (Cr.)

Risk & Rewards are Risk & Rewards are not

Transferred Transferred

Bank (Dr.) Bank (Dr.)

Financial Assets (Cr.) Financial Liability (Cr.)

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Example of De-Recognition (Factoring):
Customer (B)
Company (A) Receivable Tk.100 from B

Factor - C

Case 1 – Factoring (Bad debts risk transfer to Factor ie. Non-recourse)

Journal Entries Debit (tk.) Credit (tk.)

Bank (Dr.) 95
P/L (Factor Fees) 5
Receivable (Financial Asset) 100

Case 2 – Factoring (Bad debts risk not transfer to Factor ie. Recourse)
When cash is received by factor:

Journal Entries Debit (tk.) Credit (tk.)

P/L (Factor Fees) 5
Financial Liability 95
Receivable (Financial Asset) 100

Para 3.2.3

An entity shall derecognise a financial asset when, and only when:

i) the contractual rights to the cash flows from the financial asset expire, or

ii) it transfers the financial asset as set out in paragraphs 3.2.4 and 3.2.5 and the
transfer qualifies for derecognition in accordance with paragraph 3.2.6.

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Para 3.2.4
An entity transfers a financial asset if, and only if, it either:

(a) transfers the contractual rights to receive the cash flows of the financial
asset, or

(b) retains the contractual rights to receive the cash flows of the financial asset
but assumes a contractual obligation to pay the cash flows to one or more
recipients in an arrangement that meets the conditions in paragraph 3.2.5.

Para 3.2.5
When an entity retains the contractual rights to receive the cash flows of a
financial asset (the ‘original asset’), but assumes a contractual obligation to pay
those cash flows to one or more entities (the ‘eventual recipients’), the entity
treats the transaction as a transfer of a financial asset if, and only if, all of the
following three conditions are met.

(a) The entity has no obligation to pay amounts to the eventual recipients
unless it collects equivalent amounts from the original asset. Short-term
advances by the entity with the right of full recovery of the amount lent plus
accrued interest at market rates do not violate this condition.
(b) The entity is prohibited by the terms of the transfer contract from selling
or pledging the original asset other than as security to the eventual recipients
for the obligation to pay them cash flows.
(c) The entity has an obligation to remit any cash flows it collects on behalf
of the eventual recipients without material delay. In addition, the entity is
not entitled to reinvest such cash flows, except for investments in cash or
cash equivalents (as defined in IAS 7 Statement of Cash Flows) during the
short settlement period from the collection date to the date of required
remittance to the eventual recipients, and interest earned on such
investments is passed to the eventual recipients.
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Para 3.2.6

When an entity transfers a financial asset (see paragraph 3.2.4), it shall evaluate
the extent to which it retains the risks and rewards of ownership of the financial
asset. In this case:

(a) if the entity transfers substantially all the risks and rewards of ownership
of the financial asset, the entity shall derecognise the financial asset and
recognise separately as assets or liabilities any rights and obligations created
or retained in the transfer.
(b) if the entity retains substantially all the risks and rewards of ownership of
the financial asset, the entity shall continue to recognise the financial asset.
(c) if the entity neither transfers nor retains substantially all the risks and
rewards of ownership of the financial asset, the entity shall determine
whether it has retained control of the financial asset. In this case: (i) if the
entity has not retained control, it shall derecognise the financial asset and
recognise separately as assets or liabilities any rights and obligations created
or retained in the transfer. (ii) if the entity has retained control, it shall
continue to recognise the financial asset to the extent of its continuing
involvement in the financial asset (see paragraph 3.2.16).

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The following flow chart illustrates the evaluation of whether and to what extent a
financial asset is derecognized:

Consolidate all subsidiaries [Paragraph 3.2.1]

Determine whether the derecognition principles below are applied to a

part or all of an asset (or group of similar assets) [Paragraph 3.2.2]

Have the rights to the cash flows from the asset Derecognise the asset
expired? [Paragraph 3.2.3(a)] Yes

No

Has the entity transferred its rights to receive the cash

flows from the asset? [Paragraph 3.2.4(a)]
No

Has the entity assumed an obligation to pay the Continue to

cash flows from the asset that meets the No recognise the asset
conditions in paragraph 3.2.5? [Paragraph 3.2.4(b)]
Yes

Has the entity transferred substantially all risks Derecognise the

and rewards? [Paragraph 3.2.6(a)] Yes asset
No

Has the entity retained substantially all risks and Continue to

rewards? [Paragraph 3.2.6(b)] Yes recognise the asset
No

Has the entity retained control of the asset? Derecognise the

[Paragraph 3.2.6(c)] No asset
Yes

Continue to recognise the asset to the extent of the entity’s

continuing Page
involvement
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 Financial liabilities

Financial liabilities - subsequent classification and measurement

Recognition – Chapter 3
Para 3.1 - Initial recognition
Para 3.1.1

An entity shall recognise a financial liability in its statement of

financial position when, and only when, the entity becomes party
to the contractual provisions of the instrument.

▪ When an entity first recognises a financial liability, it shall

classify it in accordance with paragraphs 4.2.1 and 4.2.2 and
Measure it in accordance with paragraph 5.1.1.

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Para 4.2.1 and para 4.2.2 Classification of financial liabilities

An entity shall classify financial liabilities as subsequently measured at –

Fair Value Through

Amortised Cost Or
Profit or Loss
(FVTPL)

In addition, specific guidance exists for:

i) Financial guarantee contracts, and
ii) Commitments to provide a loan at a below market interest rate
iii) Financial Liabilities that arise when the transfer of a financial asset
either does not qualify for derecognition or where there is continuing
involvement.

5.1 Initial measurement

Para 5.1.1 At initial recognition,

An entity shall measure a financial liability at its fair value plus or minus, in the case of
a financial liability not at fair value through profit or loss,
transaction costs that are directly attributable to the acquisition or issue of the
financial liability.

Transaction Costs
Incremental costs that are directly attributable to the acquisition, issue or disposal of a
financial liability.
An incremental cost is one that would not have been incurred if the entity had not
acquired, issued or disposed of the financial instrument.
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 Subsequent measurement – para 5.3
Financial liabilities are measured at amortised cost unless either:
• The financial liability is held for trading and is therefore required to be
measured at FVTPL (e.g. derivatives not designated in a hedging
relationship); or

• The entity elects to measure the financial liability at FVTPL (using the
fair value option)

Reclassification of Financial liabilities

Para 4.4.2 An entity shall not reclassify any financial liability.
Derecognition of financial liabilities -para 3.3

Para 3.3.1 An entity shall remove a financial liability (or a part of a financial
liability) from its statement of financial position when, and only when,
➢ it is extinguished—ie when the obligation specified in the contract is
discharged or cancelled or expires.

• An exchange between an existing borrower and lender of debt instruments

with substantially different terms shall be accounted for as an
extinguishment of the original financial liability and the recognition of a new
financial liability.
• Similarly, a substantial modification of the terms of an existing financial
liability or a part of it (whether or not attributable to the financial difficulty
of the debtor) shall be accounted for as an extinguishment of the original
financial liability and the recognition of a new financial liability.

• The difference between the carrying amount of a financial liability (or part of
a financial liability) extinguished or transferred to another party and the
consideration paid, including any non-cash assets transferred or liabilities
assumed, shall be recognised Page
in profit
22 of or
32 loss.
5.5 Impairment
Recognition of expected credit losses
5.2 Subsequent measurement of financial assets
5.2.2 An entity shall apply the impairment requirements in Section 5.5 to financial
assets that are –

measured at amortised cost in accordance with paragraph 4.1.2 and

to financial assets that are measured at fair value through other comprehensive
income in accordance with paragraph 4.1.2A.

General approach
Para 5.5.1
An entity shall recognise a loss allowance for expected credit losses on a financial asset
that is –
i) measured at amortised cost in accordance with paragraphs 4.1.2 (eg. Debt
securities, Receivables, Loans etc.)
ii) measured at fair value through other comprehensive income (FVTOCI) in
accordance with paragraphs 4.1.2A (eg. Debt securities, Receivables, Loans
etc.),
iii) a lease receivable (IFRS 16),
iv) a contract asset or a loan commitment and
v) a financial guarantee contract to which the impairment requirements apply
in accordance with paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d).

• Shares, equity instrument, derivatives and similar types are not subject to
impairment loss under IFRS 9 because these assets are measured at fair value
and then the potential impairment is a part of fair value measurement.
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Impairment – Expected Credit Loss Model
Impairment Stage 1 Stage 2 Stage 3
Performing Credit risk Credit – Impaired
significantly (The default event
Financial Assets (Financial assets who increased has occurred) ie.
are expected to (Credit risk increases loss occurred.
perform in line with such that credit
the contract- ie. quality is not low risk
Insignificant – ie significant
deterioration. deterioration) – Risk
of loss.

12-months expected Lifetime expected Lifetime actual

credit loss credit loss credit loss
Loss Allowance (At the time of initial (PV of losses that
recgnition, recognize (PV of expected have arisen when
the expected loss losses that arises if a the borrower
due to events that borrower defaults on defaults on their
are possible with in their obligations obligations
12months after the throughout the life throughout the life
reporting day. of the financial of the financial
instrument. instrument

On Gross carrying On Gross carrying On Net carrying

amount amount amount
Interest Revenue (Effective rate X (Effective rate X (Effective rate X
Gross Carrying Gross Carrying Net Carrying
Amount) Amount) Amount)

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Hedged Accounting
Objective and scope of hedge accounting
The objective of hedge accounting is to represent, in the financial statements, the
effect of an entity’s risk management activities that use financial instruments to
manage exposures arising from particular risks that could affect profit or loss (or other
comprehensive income, in the case of investments in equity instruments for which an
entity has elected to present changes in fair value in other comprehensive income).
This approach aims to convey the context of hedging instruments for which hedge
accounting is applied in order to allow insight into their purpose and effect.

Qualifying criteria for hedge accounting

A hedging relationship qualifies for hedge accounting only if all of the following criteria
are met:
(a) the hedging relationship consists only of eligible hedging instruments and eligible
hedged items.
(b) at the inception of the hedging relationship there is formal designation and
documentation of the hedging relationship and the entity’s risk management objective
and strategy for undertaking the hedge. That documentation shall include
identification of the hedging instrument, the hedged item, the nature of the risk being
hedged and how the entity will assess whether the hedging relationship meets the
hedge effectiveness requirements (including its analysis of the sources of hedge
ineffectiveness and how it determines the hedge ratio).
(c) the hedging relationship meets all of the following hedge effectiveness
requirements:
(i) there is an economic relationship between the hedged item and the hedging
instrument.
(ii) the effect of credit risk does not dominate the value changes that result from that
economic relationship; and

Page 25 of 32
(iii) the hedge ratio of the hedging relationship is the same as that resulting from the
quantity of the hedged item that the entity actually hedges and the quantity of the
hedging instrument that the entity actually uses to hedge that quantity of hedged
item. However, that designation shall not reflect an imbalance between the weightings
of the hedged item and the hedging instrument that would create hedge
ineffectiveness (irrespective of whether recognized or not) that could result in an
accounting outcome that would be inconsistent with the purpose of hedge accounting.

Hedging instruments
Qualifying instruments
A derivative measured at fair value through profit or loss may be designated as a
hedging instrument, except for some written options.
A non-derivative financial asset or a non-derivative financial liability measured at fair
value through profit or loss may be designated as a hedging instrument unless it is a
financial liability designated as at fair value through profit or loss for which the amount
of its change in fair value that is attributable to changes in the credit risk of that liability
is presented in other comprehensive income.
For a hedge of foreign currency risk, the foreign currency risk component of a non-
derivative financial asset or a non-derivative financial liability may be designated as a
hedging instrument provided that it is not an investment in an equity instrument for
which an entity has elected to present changes in fair value in other comprehensive
income.
For hedge accounting purposes, only contracts with a party external to the reporting
entity (i.e. external to the group or individual entity that is being reported on) can be
designated as hedging instruments.

Page 26 of 32
Designation of hedging instruments
A qualifying instrument must be designated in its entirety as a hedging instrument.
The only exceptions permitted are:
(a) separating the intrinsic value and time value of an option contract and designating
as the hedging instrument only the change in intrinsic value of an option and not the
change in its time value;
(b) separating the forward element and the spot element of a forward contract and
designating as the hedging instrument only the change in the value of the spot element
of a forward contract and not the forward element; similarly, the foreign currency
basis spread may be separated and excluded from the designation of a financial
instrument as the hedging instrument; and
(c) a proportion of the entire hedging instrument, such as 50 per cent of the nominal
amount, may be designated as the hedging instrument in a hedging relationship.
However, a hedging instrument may not be designated for a part of its change in fair
value that results from only a portion of the time period during which the hedging
instrument remains outstanding.

Hedged items
A hedged item can be a recognized asset or liability, an unrecognized firm
commitment, a forecast transaction or a net investment in a foreign operation. The
hedged item can be:
(a) a single item; or
(b) a group of items
A hedged item can also be a component of such an item or group of items. The hedged
item must be reliably measurable.
If a hedged item is a forecast transaction (or a component thereof), that transaction
must be highly probable.
An aggregated exposure that is a combination of an exposure that could qualify as a
hedged item and a derivative may be designated as a hedged item. This includes a

Page 27 of 32
forecast transaction of an aggregated exposure (i.e. uncommitted but anticipated
future transactions that would give rise to an exposure and a derivative) if that
aggregated exposure is highly probable and, once it has occurred and is therefore no
longer forecast, is eligible as a hedged item.
For hedge accounting purposes, only assets, liabilities, firm commitments or highly
probable forecast transactions with a party external to the reporting entity can be
designated as hedged items. Hedge accounting can be applied to transactions
between entities in the same group only in the individual or separate financial
statements of those entities and not in the consolidated financial statements of the
group, except for the consolidated financial statements of an investment entity, as
defined in IFRS 10 Consolidated Financial Statements, where transactions between an
investment entity and its subsidiaries measured at fair value through profit or loss will
not be eliminated in the consolidated financial statements.

Accounting for qualifying hedging relationships

An entity applies hedge accounting to hedging relationships that meet the qualifying
criteria (which include the entity’s decision to designate the hedging relationship).
There are three types of hedging relationships:
(a) fair value hedge: a hedge of the exposure to changes in fair value of a recognized
asset or liability or an unrecognized firm commitment, or a component of any such
item, that is attributable to a particular risk and could affect profit or loss.
(b) cash flow hedge: a hedge of the exposure to variability in cash flows that is
attributable to a particular risk associated with all, or a component of, a recognized
asset or liability (such as all or some future interest payments on variable-rate debt)
or a highly probable forecast transaction and could affect profit or loss.
(c) hedge of a net investment in a foreign operation as defined in IAS 21 The effects of
changes in Foreign Exchange Rates.

Page 28 of 32
If a hedging relationship ceases to meet the hedge effectiveness requirement relating
to the hedge ratio but the risk management objective for that designated hedging
relationship remains the same, an entity shall adjust the hedge ratio of the hedging
relationship so that it meets the qualifying criteria again.
An entity shall discontinue hedge accounting prospectively only when the hedging
relationship (or a part of a hedging relationship) ceases to meet the qualifying criteria
(after taking into account any rebalancing of the hedging relationship, if applicable).
This includes instances when the hedging instrument expires or is sold, terminated or
exercised. For this purpose, the replacement or rollover of a hedging instrument into
another hedging instrument is not an expiration or termination if such a replacement
or rollover is part of, and consistent with, the entity’s documented risk management
objective.
Discontinuing hedge accounting can either affect a hedging relationship in its entirety
or only a part of it (in which case hedge accounting continues for the remainder of the
hedging relationship).

Fair value hedges

As long as a fair value hedge meets the qualifying criteria, the hedging relationship
shall be accounted for as follows:
(a) the gain or loss on the hedging instrument shall be recognized in profit or loss (or
other comprehensive income, if the hedging instrument hedges an equity instrument
for which an entity has elected to present changes in fair value in other comprehensive
income).
(b) the hedging gain or loss on the hedged item shall adjust the carrying amount of the
hedged item (if applicable) and be recognized in profit or loss but
(i) If the hedged item is a financial asset (or a component thereof) that is measured at
fair value through other comprehensive income, the hedging gain or loss on the
hedged item shall be recognised in profit or loss,

Page 29 of 32
(ii) if the hedged item is an equity instrument for which an entity has elected to present
changes in fair value in other comprehensive income, those amounts shall remain in
other comprehensive income,
(iii) when a hedged item is an unrecognized firm commitment (or a component
thereof), the cumulative change in the fair value of the hedged item subsequent to its
designation is recognized as an asset or a liability with a corresponding gain or loss
recognized in profit or loss.

Cash flow hedges

As long as a cash flow hedge meets the qualifying criteria, the hedging relationship
shall be accounted for as follows:
(a) the separate component of equity associated with the hedged item (cash flow
hedge reserve) is adjusted to the lower of the following (in absolute amounts):
(i) the cumulative gain or loss on the hedging instrument from inception of the hedge;
and
(ii) the cumulative change in fair value (present value) of the hedged item (i.e. the
present value of the cumulative change in the hedged expected future cash flows)
from inception of the hedge.
(b) the portion of the gain or loss on the hedging instrument that is determined to be
an effective hedge (i.e. the portion that is offset by the change in the cash flow hedge
reserve calculated in accordance with (a)) shall be recognized in other comprehensive
income.
(c) any remaining gain or loss on the hedging instrument (or any gain or loss required
to balance the change in the cash flow hedge reserve calculated in accordance with
(a)) is hedge ineffectiveness that shall be recognized in profit or loss.
(d) the amount that has been accumulated in the cash flow hedge reserve in
accordance with (a) shall be accounted for as follows:

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(i) if a hedged forecast transaction subsequently results in the recognition of a non-
financial asset or non-financial liability, or a hedged forecast transaction for a non-
financial asset or a non-financial liability becomes a firm commitment for which fair
value hedge accounting is applied, the entity shall remove that amount from the cash
flow hedge reserve and include it directly in the initial cost or other carrying amount
of the asset or the liability. This is not a reclassification adjustment and hence it does
not affect other comprehensive income.
(ii) for cash flow hedge, other than those covered by (i), that amount shall be
reclassified from the cash flow hedge reserve 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 (for example, in the periods that interest income or
interest expense is recognized or when a forecast sale occurs).
(iii) however, if that amount is a loss and an entity expects that all or a portion of that
loss will not be recovered in one or more future periods, it shall immediately reclassify
the amount that is not expected to be recovered into profit or loss as a reclassification
adjustment.

Hedges of a net investment in a foreign operation

Hedges of a net investment in a foreign operation, including a hedge of a monetary
item that is accounted for as part of the net investment shall be accounted for similarly
to cash flow hedges:
(a) the portion of the gain or loss on the hedging instrument that is determined to be
an effective hedge shall be recognized in other comprehensive income; and
(b) the ineffective portion shall be recognized in profit or loss.
The cumulative gain or loss on the hedging instrument relating to the effective portion
of the hedge that has been accumulated in the foreign currency translation reserve
shall be reclassified from equity to profit or loss as a reclassification adjustment on the
disposal or partial disposal of the foreign operation.

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Hedges of a group of items
A group of items (including a group of items that constitute a net position is an eligible
hedged item only if:
(a) it consists of items (including components of items) that are, individually, eligible
hedged items;
(b) the items in the group are managed together on a group basis for risk management
purposes; and
(c) in the case of a cash flow hedge of a group of items whose variabilities in cash flows
are not expected to be approximately proportional to the overall variability in cash
flows of the group so that offsetting risk positions arise:
(i) it is a hedge of foreign currency risk; and
(ii) the designation of that net position specifies the reporting period in which the
forecast transactions are expected to affect profit or loss, as well as their nature and
volume.

Option to designate a credit exposure as measured at fair value through

profit or loss
If an entity uses a credit derivative that is measured at fair value through profit or loss
to manage the credit risk of all, or a part of, a financial instrument (credit exposure) it
may designate that financial instrument to the extent that it is so managed (i.e. all or
a proportion of it) as measured at fair value through profit or loss if:
(a) the name of the credit exposure (for example, the borrower, or the holder of a loan
commitment) matches the reference entity of the credit derivative (‘name matching’);
and
(b) the seniority of the financial instrument matches that of the instruments that can
be delivered in accordance with the credit derivative.

Thank You

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