lOMoARcPSD|8949379
IFRS 9 Hedging Notes
Financial accounting 300 (University of Pretoria)
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Downloaded by Lexi Claasen ()
, lOMoARcPSD|8949379
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
Downloaded by Lexi Claasen ()
IFRS 9 Hedging Notes
Financial accounting 300 (University of Pretoria)
StuDocu is not sponsored or endorsed by any college or university
Downloaded by Lexi Claasen ()
, lOMoARcPSD|8949379
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
Downloaded by Lexi Claasen ()
