the benchmark gas oil crack spread derivative (ie the derivative for the price differential between crude oil and gas oil—a refining margin), which is indexed to Brent crude oil. Financial liability at fair value through profit or loss. Such a contract is within the scope of this Standard unless it was entered into and continues to be held for the purpose of delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements (see, BA.4 A regular way purchase or sale gives rise to a fixed price commitment between trade date and settlement date that meets the definition of a derivative. It hedges the foreign currency risk of the net position of FC20 using a forward exchange contract for FC20. Consequently, a ‘hypothetical derivative’ cannot be used to include features in the value of the hedged item that only exist in the hedging instrument (but not in the hedged item). Australian Accounting Standard AASB 9 Financial Instruments (as amended) is set out in paragraphs 1.1 â 7.2.21 and Appendices A and B. Hence, Entity C concludes that the price risk of its jet fuel purchases includes a crude oil price risk component based on Brent crude oil and a gas oil price risk component, even though crude oil and gas oil are not specified in any contractual arrangement. Note 4 â Financial guarantees Financial guarantee contracts are within IAS 39âs scope from the issuerâs perspective, unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to â¦ If the hedge was for example for a one-sided risk, the hypothetical derivative would represent the intrinsic value of a hypothetical option that at the time of designation of the hedging relationship is at the money if the hedged price level is the current market level, or out of the money if the hedged price level is above (or, for a hedge of a long position, below) the current market level. B6.6.14 If the group of items does not have any offsetting risk positions (for example, a group of foreign currency expenses that affect different line items in the statement of profit or loss and other comprehensive income that are hedged for foreign currency risk) then the reclassified hedging instrument gains or losses shall be apportioned to the line items affected by the hedged items. BA.8 The fact that a liability is used to fund trading activities does not in itself make that liability one that is held for trading. If, however, the hedge is a cash flow hedge, then the net position can only be eligible as a hedged item if it is a hedge of foreign currency risk and the designation of that net position specifies the reporting period in which the forecast transactions are expected to affect profit or loss and also specifies their nature and volume. For example, when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90 per cent share of all cash flows of a debt instrument. Net position hedging must form part of an established risk management strategy. IFRS 9 and IAS 39 are two most important accounting standards for corporate treasurers because they address how to account for financial instruments, or how they are measured on an ongoing basis. The part of the interest payments that the entity would give up upon termination or transfer of the servicing contract is allocated to the servicing asset or servicing liability. If the counterparty to that derivative experiences a severe deterioration in its credit standing, the effect of the changes in the counterparty’s credit standing might outweigh the effect of changes in the commodity price on the fair value of the hedging instrument, whereas changes in the value of the hedged item depend largely on the commodity price changes. B6.5.3 A hedge of a firm commitment (for example, a hedge of the change in fuel price relating to an unrecognised contractual commitment by an electric utility to purchase fuel at a fixed price) is a hedge of an exposure to a change in fair value. Entity D concludes that the benchmark rate is a component that can be separately identified and reliably measured. Hence, there must be an expectation that the value of the hedging instrument and the value of the hedged item will systematically change in response to movements in either the same underlying or underlyings that are economically related in such a way that they respond in a similar way to the risk that is being hedged (for example, Brent and WTI crude oil). 4.3.7 If an entity is unable to measure reliably the fair value of an embedded derivative on the basis of its terms and conditions, the fair value of the embedded derivative is the difference between the fair value of the hybrid contract and the fair value of the host. The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. (b) an entity would retain quantities of the hedging instrument and the hedged item that it actually uses, resulting in a hedge ratio that, in new circumstances, would reflect an imbalance that would create hedge ineffectiveness that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting (ie an entity must not create an imbalance by omitting to adjust the hedge ratio). An example is when the time value of an option relates to a hedged item that results in the recognition of an item whose initial measurement includes transaction costs (for example, an entity hedges a commodity purchase, whether it is a forecast transaction or a firm commitment, against the commodity price risk and includes the transaction costs in the initial measurement of the inventory). The strategy is to maintain between 20 per cent and 40 per cent of the debt at fixed rates. (c) Entity C hedges part of its future jet fuel purchases on the basis of its consumption forecast up to 24 months before delivery and increases the volume that it hedges over time. In a nutshell. An entity determines the aligned forward element using the valuation of the forward contract that would have critical terms that perfectly match the hedged item. However, from the date of rebalancing, the volume by which the hedging instrument was decreased is no longer part of the hedging relationship. The entity can do so provided that the benchmark rate is less than the effective interest rate calculated on the assumption that the entity had purchased the instrument on the day when it first designates the hedged item. Hence, in such circumstances, the change in the extent of offset is a matter of measuring and recognising hedge ineffectiveness but does not require rebalancing. The principal amount may change over the life of the financial asset (e.g. For example: (a) the hedging relationship no longer meets the risk management objective on the basis of which it qualified for hedge accounting (ie the entity no longer pursues that risk management objective); (b) the hedging instrument or instruments have been sold or terminated (in relation to the entire volume that was part of the hedging relationship); or. However, those amounts are recognised only once the related forecast transactions are recognised in the financial statements. However, if an entity has a history of having designated hedges of forecast transactions and having subsequently determined that the forecast transactions are no longer expected to occur, the entity’s ability to predict forecast transactions accurately is called into question when predicting similar forecast transactions. In particular, AASB 9 requires the Group to measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses (ECL) if the credit risk on that financial instrument has increased significantly since initial However, in contrast the entity’s execution of that strategy has changed and this means that, for CU20 of variable-rate exposure that was previously hedged, the risk management objective has changed (ie at the hedging relationship level). The forward element of a forward contract relates to the hedged item if the critical terms of the forward contract (such as the nominal amount, life and underlying) are aligned with the hedged item. B6.5.24 For the purposes of this Standard, an entity’s risk management strategy is distinguished from its risk management objectives. These changes are measured starting from, and by reference to, the date of rebalancing instead of the date on which the hedging relationship was designated. Using a hypothetical derivative is one possible way of calculating the change in the value of the hedged item. B6.4.2 When designating a hedging relationship and on an ongoing basis, an entity shall analyse the sources of hedge ineffectiveness that are expected to affect the hedging relationship during its term. For example, in paragraph B6.3.18(d), the total defined nominal amount of CU100 million must be tracked in order to track the bottom layer of CU20 million or the top layer of CU30 million. However, an entity must adjust the hedge ratio that results from the quantities of the hedged item or the hedging instrument that it actually uses if: (a) the hedge ratio that results from changes to the quantities of the hedging instrument or the hedged item that the entity actually uses would reflect an imbalance that would create hedge ineffectiveness that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting; or. Standards/Accounting & Auditing as amended, taking into account amendments up to AASB 2014-5 Amendments to Australian Accounting Standards arising from AASB 15. BA.7 Financial liabilities held for trading include: (a) derivative liabilities that are not accounted for as hedging instruments; (b) obligations to deliver financial assets borrowed by a short seller (ie an entity that sells financial assets it has borrowed and does not yet own); (c) financial liabilities that are incurred with an intention to repurchase them in the near term (eg a quoted debt instrument that the issuer may buy back in the near term depending on changes in its fair value); and. AASB 9: Financial Instruments has been applied using the retrospective method, with comparative amounts restated where appropriate. IFRS 9 Financial Instruments defines the financial guarantee as a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. The ECL framework is applied to th ose assets and any others that are subject to IFRS 9âs impairment account ing, a group that includes lease receivables, loan commitments and financial guarantee contracts. Entity A has no other exposures to FC. B6.5.4 When measuring hedge ineffectiveness, an entity shall consider the time value of money. Paragraphs in bold type state the main principles. B6.5.13 Conversely, if changes in the extent of offset indicate that the fluctuation is around a hedge ratio that is different from the hedge ratio that is currently used for that hedging relationship, or that there is a trend leading away from that hedge ratio, hedge ineffectiveness can be reduced by adjusting the hedge ratio, whereas retaining the hedge ratio would increasingly produce hedge ineffectiveness. An entity, which may be a transferor, that services transferred assets may hold a clean-up call to purchase remaining transferred assets when the amount of outstanding assets falls to a specified level at which the cost of servicing those assets becomes burdensome in relation to the benefits of servicing. B6.5.36 The accounting for the forward element of a forward contract in accordance with paragraph 6.5.16 also applies if, at the date on which the forward contract is designated as a hedging instrument, the forward element is nil. B6.4.1 Hedge effectiveness is the extent to which changes in the fair value or the cash flows of the hedging instrument offset changes in the fair value or the cash flows of the hedged item (for example, when the hedged item is a risk component, the relevant change in fair value or cash flows of an item is the one that is attributable to the hedged risk). (ii) the pricing of refined oil products does not depend on which particular crude oil is processed by a particular refinery because those refined oil products (such as gas oil or jet fuel) are standardised products. In this situation the risk management strategy itself remains unchanged. B6.5.30 The characteristics of the hedged item, including how and when the hedged item affects profit or loss, also affect the period over which the time value of an option that hedges a time-period related hedged item is amortised, which is consistent with the period over which the option’s intrinsic value can affect profit or loss in accordance with hedge accounting. The new financial instruments standard is already being applied, with December year-end companies now 6 months into applying the new rules and June year-ends having begun on 1 July 2018. For example, an entity may hold a portfolio of investments that it manages in order to collect contractual cash flows and another portfolio of investments that it manages in order to trade to realise fair value changes. The nil net position would be eligible for hedge accounting only if the conditions in paragraph 6.6.6 are met. However, the entity cannot designate a component that is equal to the full change in the benchmark crude oil price. The adoption of AASB 9 has changed AGLâs accounting for impairment losses by replacing AASB 139âs incurred loss approach with a forward-looking expected credit loss approach. Such a repurchase does not preclude derecognition provided that the original transaction met the derecognition requirements. An example is forecast sales or purchases of inventories between members of the same group if there is an onward sale of the inventory to a party external to the group. recognition, an issuer of such a contract shall (unless. That is still consistent with an economic relationship between the hedging instrument and the hedged item if the values of the hedging instrument and the hedged item are still expected to typically move in the opposite direction when the underlyings move. Conversely, in many cases an inflation risk component is not separately identifiable and reliably measurable. Both sales and purchases are denominated in the same foreign currency. In this Standard monetary amounts are denominated in ‘currency units’ (CU) and ‘foreign currency units’ (FC). All the paragraphs have equal authority. B6.5.7 Rebalancing refers to the adjustments made to the designated quantities of the hedged item or the hedging instrument of an already existing hedging relationship for the purpose of maintaining a hedge ratio that complies with the hedge effectiveness requirements. Normally this would be approved by key management personnel as defined in AASB 124, Application of the hedge effectiveness requirements to a hedge of a net position, Cash flow hedges that constitute a net position, Layers of groups of items designated as the hedged item, Presentation of hedging instrument gains or losses, Effective date and transition (chapter 7), BA.2 The definition of a derivative in this Standard includes contracts that are settled gross by delivery of the underlying item (eg a forward contract to purchase a fixed rate debt instrument). B6.5.14 Rebalancing means that, for hedge accounting purposes, after the start of a hedging relationship an entity adjusts the quantities of the hedging instrument or the hedged item in response to changes in circumstances that affect the hedge ratio of that hedging relationship. B6.5.31 The accounting for the time value of options in accordance with paragraph 6.5.15 also applies to a combination of a purchased and a written option (one being a put option and one being a call option) that at the date of designation as a hedging instrument has a net nil time value (commonly referred to as a ‘zero-cost collar’). However, the Standard specifies three different approaches depending on the Entity A does not manage foreign currency risk on a net basis. In this case: (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, 3.2.7 The transfer of risks and rewards (see, 3.2.9 Whether the entity has retained control (see, 3.2.10 If an entity transfers a financial asset in a transfer that qualifies for derecognition in its entirety and retains the right to service the financial asset for a fee, it shall recognise either a servicing asset or a servicing liability for that servicing contract. financial guarantee) and a revenue component, the fair value of the financial instrument is first measured under AASB 9 Financial Instruments and the balance contract consideration is allocated in accordance The addition of new debt instruments and the derecognition of debt instruments continuously change that exposure (ie it is different from simply running off a position that matures). â¢ financial guarantee contracts (except those accounted for as insurance contracts). AASB 9 Financial Instruments applies for reporting periods beginning on or after 1 January 2018 and replaces AASB 139 Financial Instruments: Recognition and Measurement. In those circumstances the inflation risk component could be determined by discounting the cash flows of the hedged debt instrument using the term structure of zero-coupon real interest rates (ie in a manner similar to how a risk-free (nominal) interest rate component can be determined). (b) a part of a physical volume, for example, the bottom layer, measuring 5 million cubic metres, of the natural gas stored in location XYZ; (c) a part of a physical or other transaction volume, for example, the first 100 barrels of the oil purchases in June 201X or the first 100 MWh of electricity sales in June 201X; or. An entity may transfer to a transferee a fixed rate financial asset and enter into an interest rate swap with the transferee to receive a fixed interest rate and pay a variable interest rate based on a notional amount that is equal to the principal amount of the transferred financial asset. derivatives at fair value at initial recognition and subsequently. However, a single entity may have more than one business model for managing its financial instruments. If there is more than one counterparty, each counterparty is not required to have a proportionate share of the cash flows provided that the transferring entity has a fully proportionate share. The entity also documents that the bottom layer of the purchases (FC150) is made up of purchases of the first FC60 of Machinery Type A, the first FC40 of Machinery Type B and the first FC50 of Raw Material A. Approaches depending on the the financial asset or exposure similar financial assets and liabilities, hedge. 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