Derecognition of Financial Instruments
A Financial asset should be derecognised if one of the following has occurred:
The contractual rights to the cash flows of the financial asset have expired.
The financial asset has been sold and substantially all the risks and rewards of ownership
have been transferred from the seller to the buyer.
A Financial liability should be derecognised when the obligation specified in the contract is discharged,
cancelled or has expired.
The accounting treatment of derecognition is as follows: -
The difference between the carrying amount of the asset or liability and the amount received or
paid should be recognised in profit or loss for the period.
For investments in equity instruments held at fair value through other comprehensive income, the
cumulative gains and losses recognised in other comprehensive income are not reclassified to
profit or loss on disposal.
For investments in debt instruments held at fair value through other comprehensive income, the
cumulative gains and losses recognised in other comprehensive income are reclassified to profit
or loss on disposal.
Modification of debt
If the terms of an existing loan are changed, or it is exchanged for a new loan with the existing lender, the
Accounting treatment depends on whether the new terms are deemed to be substantially different.
If the terms are substantially different, the originally liability is derecognised and a new liability
recognised at fair value. Any difference is recognised in profit or loss, alongside any fees incurred.
If the terms are not substantially different, the original liability is restated to the present value of
the revised cash flows, with any fees paid being deducted. Any difference is recognised in profit
or loss.
Hedge Accounting
Types of hedge accounting
A Fair value hedge A Cash flow hedge
‘A hedge of the exposure to changes in ‘A hedge of the exposure to
fair value of a recognised asset or variability in cash flows that is
liability or an unrecognized firm attributable to a particular risk
commitment that is attributable to a associated with a recognised asset
particular risk and could affect profit or or liability or a highly probable
loss (or other comprehensive income for forecast transaction and that could
equity investments measured at fair affect profit or loss’ (IFRS 9, para
value through other comprehensive 6.5.2).
income) (IFRS 9, para 6.5.2)
Key Point
Derivatives introduce volatility into profit or loss. Hedge accounting is a method of managing this by
designating one or more hedging instruments so that their change in fair value is offset, in whole or in
part, by the change in fair value or cash flows of a hedged item.
Criteria
Under IFRS 9, hedge accounting rules can only be applied if the hedging relationship meets the following:
The hedge consists of eligible hedging instruments and hedged items.
At the inception of the hedge formal documentation identifies the hedged item and the hedging
instrument.
The hedging relationship is effective.
If the hedged item is a forecast transaction, then the transaction must be highly probable.
A hedging relationship is effective if the following three criteria are met:
1. ‘There is an economic relationship between the hedged item and the hedging instrument.
2. The effect of credit risk does not dominate the value changes that result from that economic
relationship.
3. 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’ (IFRS 9, para 6.4.1)
Accounting treatment of a fair value hedge
At the reporting date:
The hedging instrument will be remeasured to fair value.
The carrying amount of the hedged item will be adjusted for the change in fair value since the
inception of the hedge.
The gain (or loss) on the hedging instrument and the loss (or gain) on the hedged item will be recorded:
In profit or loss in most cases, but
In other comprehensive income if the hedged item is an investment in equity that is measured at
fair value through other comprehensive income.
Accounting treatment of a Cash flow hedge
For Cash flow hedges, the hedging instrument will be remeasured to fair value at reporting date.
The gain or loss is recognised in other comprehensive income.
However, if the gain or loss on the hedging instrument since the inception of the hedge is greater
than the loss or gain on the hedged item then the excess gain or loss on the instrument must be
recognised in profit or loss.
Discontinuing Hedge Accounting
An entity must cease hedge accounting if any of the following occur: -
The hedging instrument expires or is exercised, sold or terminated.
The hedge no longer meets the hedging criteria.
A forecast future transaction that qualifies as a hedged item is no longer highly probable.
The discontinuance should be accounted for prospectively (entries posted to date are not reversed)
Disclosure of Financial Instruments
IFRS 7 Financial Instruments: Disclosures requires that entities disclose: -
1. Information about the significance of financial instruments for an entity’s financial position and
performance.
2. Information about the nature and extent of risks arising from financial instruments.