Disclosures in respect of hedge accounting

  1. An entity shall apply the disclosure requirements for those risk exposures that an entity hedges and for which it elects to apply hedge accounting. Hedge accounting disclosures shall provide information about:
    • an entity’s risk management strategy and how it is applied to manage risk;
    • how the entity’s hedging activities may affect the amount, timing and uncertainty of its future cash flows; and
    • the effect that hedge accounting has had on the entity’s balance sheet, statement of profit and loss and statement of changes in equity.
  2. An entity shall present the required disclosures in a single note or separate section in its financial statements. However, an entity need not duplicate information that is already presented elsewhere, provided that the information is incorporated by cross-reference from the financial statements to some other statement, such as a management commentary or risk report, that is, available to users of the financial statements on the same terms as the financial statements and at the same time. Without the information incorporated by cross-reference, the financial statements are incomplete.
  3. When an entity is required to separate by risk category the information disclosed, the entity shall determine each risk category on the basis of the risk exposures an entity decides to hedge and for which hedge accounting is applied. An entity shall determine risk categories consistently for all hedge accounting disclosures.
  4. An entity shall determine how much detail to disclose, how much emphasis to place on different aspects of the disclosure requirements, the appropriate level of aggregation or disaggregation, and whether users of financial statements need additional explanations to evaluate the quantitative information disclosed. However, an entity shall use the same level of aggregation or disaggregation it uses for disclosure requirements of related information in this Ind AS and Ind AS 113 ‘Fair Value Measurement’.

Risk management strategy

An entity shall explain its risk management strategy for each risk category of risk exposures that it decides to hedge and for which hedge accounting is applied. This explanation should enable users of financial statements to evaluate:

  1. How each risk arises?
  2. How the entity manages each risk; this includes whether the entity hedges an item in its entirety for all risks or hedges a risk component (or components) of an item and why?
  3. The extent of risk exposures that the entity manages.

The above information should include (but is not limited to) a description of:

  1. the hedging instruments that are used (and how they are used) to hedge risk exposures;
  2. how the entity determines the economic relationship between the hedged item and the hedging instrument for the purpose of assessing hedge effectiveness; and
  3. how the entity establishes the hedge ratio and what the sources of hedge ineffectiveness are.

Specific risk component

When an entity designates a specific risk component as a hedged item it shall provide, qualitative or quantitative information about:

  1. how the entity determined the risk component that is designated as the hedged item (including a description of the nature of the relationship between the risk component and the item as a whole); and
  2. how the risk component relates to the item in its entirety (for example, the designated risk component historically covered on average 80% of the changes in fair value of the item as a whole).

Amount, timing and uncertainty of future cash flows

An entity shall disclose by risk category quantitative information to allow users of its financial statements to evaluate the terms and conditions of hedging instruments and how they affect the amount, timing and uncertainty of future cash flows of the entity.

An entity shall provide a breakdown that discloses:

  1. A profile of the timing of the nominal amount of the hedging instrument; and
  2. If applicable, the average price or rate (for example, strike or forward prices, etc) of the hedging instrument.

In situations in which an entity frequently resets (ie, discontinues and restarts) hedging relationships because both the hedging instrument and the hedged item frequently change (ie, the entity uses a dynamic process in which both the exposure and the hedging instruments used to manage that exposure do not remain the same for long) the entity:

a)     is exempt from providing the disclosures relating to risk category quantitative information including breakdown as mentioned above;

b)    shall disclose:

(i)    information about what the ultimate risk management strategy is in relation to those hedging relationships;

(ii)   a description of how it reflects its risk management strategy by using hedge accounting and designating those particular hedging relationships; and

(iii)  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.

An entity shall disclose by risk category a description of the sources of hedge ineffectiveness that are expected to affect the hedging relationship during its term.

If other sources of hedge ineffectiveness emerge in a hedging relationship, an entity shall disclose those sources by risk category and explain the resulting hedge ineffectiveness.

For cash flow hedges, an entity shall disclose a description of any forecast transaction for which hedge accounting had been used in the previous period, but which is no longer expected to occur.

Effects of hedge accounting on financial position and performance

An entity shall disclose, in a tabular format, the following amounts related to items designated as hedging instruments separately by risk category for each type of hedge (fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation):

  1. the carrying amount of the hedging instruments (financial assets separately from financial liabilities);
  2. the line item in the balance sheet that includes the hedging instrument;
  3. the change in fair value of the hedging instrument used as the basis for recognising hedge ineffectiveness for the period; and
  4. the nominal amounts (including quantities such as tonnes or cubic metres) of the hedging instruments.

An entity shall disclose, in a tabular format, the following amounts related to hedged items separately by risk category for the types of hedges as follows:

a)     for fair value hedges:

(i)    the carrying amount of the hedged item recognised in the balance sheet (presenting assets separately from liabilities);

(ii)   the accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item recognised in the balance sheet (presenting assets separately from liabilities);

(iii)  the line item in the balance sheet that includes the hedged item;

(iv)  the change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period; and

(v)   the accumulated amount of fair value hedge adjustments remaining in the balance sheet for any hedged items that have ceased to be adjusted for hedging gains and losses.

b)    for cash flow hedges and hedges of a net investment in a foreign operation:

(i)    the change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period (ie, for cash flow hedges the change in value used to determine the recognised hedge ineffectiveness);

(ii)   the balances in the cash flow hedge reserve and the foreign currency translation reserve for continuing hedges; and

(iii)  the balances remaining in the cash flow hedge reserve and the foreign currency translation reserve from any hedging relationships for which hedge accounting is no longer applied.

An entity shall disclose, in a tabular format, the following amounts separately by risk category for the types of hedges as follows:

a)     For fair value hedges:

(i)    hedge ineffectiveness—ie, the difference between the hedging gains or losses of the hedging instrument and the hedged item—recognised in profit or loss or other comprehensive income for hedges of an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income; and

(ii)   the line item in the statement of profit and loss that includes the recognised hedge ineffectiveness.

b)    For cash flow hedges and hedges of a net investment in a foreign operation:

(i)    hedging gains or losses of the reporting period that were recognised in other comprehensive income;

(ii)   hedge ineffectiveness recognised in profit or loss;

(iii)  the line item in the statement of profit and loss that includes the recognised hedge ineffectiveness;

(iv)  the amount reclassified from the cash flow hedge reserve or the foreign currency translation reserve into profit or loss as a reclassification adjustment (see Ind AS 1) (differentiating between amounts for which hedge accounting had previously been used, but for which the hedged future cash flows are no longer expected to occur, and amounts that have been transferred because the hedged item has affected profit or loss);

(v)   the line item in the statement of profit and loss that includes the reclassification adjustment (see Ind AS 1); and

(vi)  for hedges of net positions, the hedging gains or losses recognised in a separate line item in the statement of profit and loss.

When the volume of hedging relationships to which the exemption in paragraph 23C applies is unrepresentative of normal volumes during the period (ie, the volume at the reporting date does not reflect the volumes during the period), an entity shall disclose that fact and the reason it believes the volumes are unrepresentative.

An entity shall provide a reconciliation of each component of equity and an analysis of other comprehensive income in accordance with Ind AS 1 that, taken together:

  1. differentiates, at a minimum, between the amounts that relate to the disclosures in paragraph 24C(b)(i) and (b)(iv) as well as the amounts accounted for in accordance with paragraph 6.5.11(d)(i) and (d)(iii) of Ind AS 109;
  2. differentiates between the amounts associated with the time value of options that hedge transaction-related hedged items and the amounts associated with the time value of options that hedge time-period-related hedged items when an entity accounts for the time value of an option; and
  3. differentiates between the amounts associated with forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge transaction related hedged items, and the amounts associated with forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge time-period-related hedged items.

An entity shall disclose the information required in paragraph 24E separately by risk category. This disaggregation by risk may be provided in the notes to the financial statements.

Option to designate a credit exposure as measured at FVPL

If an entity designated a financial instrument, or a proportion of it, as measured at fair value through profit or loss because it uses a credit derivative to manage the credit risk of that financial instrument it shall disclose:

  1. for credit derivatives that have been used to manage the credit risk of financial instruments designated as measured at fair value through profit or loss, a reconciliation of each of the nominal amount and the fair value at the beginning and at the end of the period;
  2. the gain or loss recognised in profit or loss on designation of a financial instrument, or a proportion of it, as measured at fair value through profit or loss; and

on discontinuation of measuring a financial instrument, or a proportion of it, at fair value through profit or loss, that financial instrument’s fair value that has become the new carrying amount and the related nominal or principal amount (except for providing comparative information in accordance with Ind AS 1, an entity does not need to continue this disclosure in subsequent periods).

What is a fair value hedge?

Fair value hedging as the name implies strives to hedge the fair value of an existing asset or liability and certain other firm commitments. In a fair value hedge, the fair value changes to the hedging instrument and the hedged item are recognised in profit and loss account.
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Steps involved in fair value hedge accounting

Identify the hedged item Identify the hedging instrument Designation/qualifying criteria of the hedge Hedge effectiveness requirements to be fulfilled Account for the hedging relationship Rebalancing and discontinuance of hedge accounting
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Accounting for fair value hedge

The hedge should be designated at the inception of the hedging relationship and a formal designation and documentation of the same required. The documentation should contain the entity’s risk management strategy and objective for undertaking the hedge. The effect of the credit risk involved in the hedging instrument, viz, the counterparty credit risk should not be such that it would vitiate the fair value changes of the hedging instrument.
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Accounting for the forward element

Change in the fair value of the forward element of a forward contract that hedges a transaction related hedged item should be recognised in other comprehensive income to the extent it relates to the hedged item. The cumulative change in the fair value arising from the forward element of the forward contract shall be accounted for as follows:
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Treatment of time value /forward points in derivatives

An entity is allowed to designate only the change in the intrinsic value of an option contract in a hedging instrument. Similarly an entity can also designate only the change in the spot value of a forward contract in a hedging instrument. In such cases, the time value of the option/forward points is accounted for depending upon the type of the hedged item that the option/forward contract hedges. The option/forward contract could be to either to hedge a transaction-related hedged item or a time-period-related hedged item.
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Accounting for the time value of options

The time value of options contract may be separated from the fair value of options contracts and the entity can designate only the change in the intrinsic value of the option. If the entity chooses to do so, then the time value of the option contract is dealt with in the following manner:
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Hedge effectiveness requirements

Rebalancing is permitted for the purpose of maintaining the hedge ratio to comply with the hedge effectiveness requirements. Changes to designate quantities of a hedged item or hedging instrument for a different purpose do not constitute rebalancing.
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Rebalancing by changing the hedge ratio

Rebalancing is a new concept introduced by a major amendment to IFRS 9 during November 2013. Rebalancing means adjustments made to the quantities of the hedged item or the hedging instrument of an existing hedging relationship for the purpose of maintaining a hedge ratio that complies with the hedge effectiveness requirements.
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Discontinuance of hedge accounting

As per the new requirements, hedge accounting cannot be voluntarily discontinued. Hedge accounting can be discontinued only if the hedge effectiveness requirements are not met or that the hedging instrument is liquidated. Even when the hedge effectiveness requirements are not met, the entity should adjust the hedge ratio through the process of rebalancing and continue with hedge accounting so long as the hedging relationship continues to meet the risk management objectives of the enterprise.
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What is a Cash flow hedge?

A cash flow hedge is a hedge of the exposure to variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a component thereof. It covers future interest payments on variable-rate debt. It also covers a highly probable forecast transaction. The requirement is that such cash flows should affect the profit and loss account.
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