International Financial Reporting Standard

IFRS 9 is an International Financial Reporting Standard (IFRS) issued by the International Accounting Standards Board (IASB). This new standard is endorsed by the European Union in November 2016 and has a mandatory effective date for annual periods beginning on or after 1 January 2018, with earlier adoption permitted. IFRS 9 will replace the accounting for financial instrument under IAS 39, as this was very complicated and difficult for companies to apply correctly. The new requirements include a new approach to hedge accounting and aligns more closely with risk management, and so should help users of financial statement in their decision-making. Although the general accounting mechanisms will largely remain unchanged, the reforms of IFRS 9 encompass an array of changes that will influence your hedge accounting process in different ways.

IRFS 9 Requirements

The completed IFRS 9 requirements, which addresses general hedging of financial and non-financial items, will have an impact on most business currently doing hedge accounting or considering it. Most of the IFRS changes will affect banks and companies involved in hedging foreign exchange and interest rate risks. However, IFRS 9 provides new possibilities for companies that focus on commodity hedging, as it allows them to more easily present financially viable hedges in their financial statements. Those companies struggled with implementing hedge accounting under IAS 39 due to its complexity, inconsistencies and inefficiencies leading to limited use of commodity hedging.

Unlike IAS 39, where the entire transaction needed to be designated, IFRS 9 provides the option of also designating individual risk components as part of the hedging relationship. As a result, the items that can be hedged through financial contracts can be presented separately in hedge accounting for the relevant transactions.

Hedge Effectiveness

Measuring hedge effectiveness and determining inefficiencies has become much less elaborate under IFRS 9 because it is not necessary to simulate the development of prices of components in the contract that are independent of the hedged commodity.

Another key change and good news for companies, is that the volume of inefficiencies to be recognised in profit or loss is significantly reduced and the probability of an ineffective hedge is diminished, if unchangeable components (e.g. delivery costs) or components subject to fluctuation independent of the underlying (e.g. premiums) are no longer included in analysis. Due to the increase in expected hedge effectiveness, hedging strategies that had been disregarded in the past due to insufficient probability of continuity (such as proxy hedges) can now be used again with reasonable expectation of effectiveness. Effectiveness now only must be measured prospectively; additional retrospective measurement is no longer required. IFRS 9 also does not define any fixed limits regarding the ratio of changes in value.

Rebalancing Hedging Relationships

Changing economic circumstances may require revising the ratio between the amount of the hhedged item and the amount of hedging instruments. The IFRS 9 hedge accounting model allows to refine the hedge ratio without having to discontinue the hedge relationship. This can be achieved by rebalancing. This is possible if there is a situation where the change in the relationship of the hedging instrument and the hedged item can be compensated by adjusting the hedge ratio. The hedge ratio can be adjusted by increasing or decreasing either the number of designated hedging instruments or hedged items. When rebalancing a hedging relationship, an entity must update its documentation of the analysis of the sources of hedge ineffectiveness that are expected to affect the hedging relationship during its remaining term.

IFRS 9 introduces a new accounting treatment for changes in the time value of options. An option’s fair value consists of its time value and its intrinsic value. The intrinsic value is the difference between the strike price and the market price of the underlying. The value that remains is the time value of the option. IFRS 9 allows (under certain conditions) fluctuations in an option’s time value to be recognized in other comprehensive income (OCI) resulting in a possible reduction in P&L volatility. Changes in the fair value of the time value are temporarily recognized in OCI. Subsequent treatment depends on whether the hedged item is transaction related or time value related. The aforementioned requires that the critical terms of the hedging instrument, in this case the option, and the hedged item are aligned (similar). If not, part of the change in time value may go through P&L.


While the IASB also provided entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 or continuing to apply the existing hedge accounting requirements in IAS 39 for all hedge accounting because it had not yet completed its project on the accounting for macro hedging, industry watchers expect few companies to have reasons not to fully adopt IFRS 9. There is less than a year left until January 2018, so transition projects should be initiated in the next few months. Pioneer Solutions’ FASTracker is an integrated derivative accounting software package that provides straight-through-processing of derivative accounting processes, from documenting accounting policies and hedging relationships to automating journal entries. It is also designed to conform to new hedge accounting regulations, such as IFRS 9.

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