ACCOUNTING

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IFRS 9 Hedging Notes


Financial accounting 300 (University of Pretoria)




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1. Introduction:
 Foreign Currency Txs or Foreign Operations – exposes entity to ∆ exchange rates = Foreign Currency
Risk
 Entity can protect itself using Hedging (trying to make foreign exchange difference as small as
possible):
o Internal Hedging
Pay foreign creditor sooner :. avoiding negative impact due to deterioration of exchange
rates

o External Hedging
Use a financial instrument (hedging instrument) to eliminate/minimize negative impact
through offsetting of foreign exchange differences – FORWARD EXCHANGE CONTRACT
(FEC)

 Forward Exchange Contract (FEC):
o Entity enters agreement with bank to purchase
 Specific amt of foreign currency
 On specified future date (maturity date of FEC)
 At specified exchange rate (regardless of spot exchange rate on that date) = forward
rate (usually at a premium or discount to current spot exch. rate)
o DERIVATIVE financial instrument :
 Value changes based on exchange rates (underlying)
 No initial investment
 Settled at future date



2. Hedge Accounting:


 Voluntary accounting model (applied if qualifying criteria met)
 Accounting mismatch occurs bet. hedged item & hedging instrument :. apply hedge accounting to
offset changes in FairV or CF
 Hedging = policy to manage certain risks ; Hedge Accounting = accounting model applied


2.1 Hedged Items (3)

Gives rise to the risk.

1


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