Financial Instruments: Recognition and
Measurement

In April 2001 the International Accounting Standards Board (Board) adopted IAS 39
Financial Instruments: Recognition and Measurement, which had originally been issued by the
International Accounting Standards Committee (IASC) in March 1999. That Standard had
replaced the original IAS 39 Financial Instruments: Recognition and Measurement, which had
been issued in December 1998. That original IAS 39 had replaced some parts of IAS 25
Accounting for Investments, which had been issued in March 1986.
In December 2003 the Board issued a revised IAS 39 as part of its initial agenda of
technical projects. The revised IAS 39 also incorporated an Implementation Guidance
section, which replaced a series of Questions & Answers that had been developed by the
IAS 39 Implementation Guidance Committee.
Following that, the Board made further amendments to IAS 39:
(a) in March 2004, to enable fair value hedge accounting to be used for a portfolio
hedge of interest rate risk;
(b) in June 2005, relating to when the fair value option could be applied;
(c) in July 2008, to provide application guidance to illustrate how the principles
underlying hedge accounting should be applied;
(d) in October 2008, to allow some types of financial assets to be reclassified; and
(e) in March 2009, to address how some embedded derivatives should be measured if
they were previously reclassified.
In August 2005 the Board issued IFRS 7 Financial Instruments: Disclosures. Consequently, the
disclosure requirements that were in IAS 39 were moved to IFRS 7.
In September 2019 the Board amended IFRS 9 and IAS 39 by issuing Interest Rate Benchmark
Reform to provide specific exceptions to hedge accounting requirements in IFRS 9 and
IAS 39 for (a) highly probable requirement; (b) prospective assessments; (c) retrospective
assessment (IAS 39 only); and (d) separately identifiable risk components. Interest Rate
Benchmark Reform also amended IFRS 7 to add specific disclosure requirements for hedging
relationships to which an entity applies the exceptions in IFRS 9 or IAS 39.
In August 2020 the Board issued Interest Rate Benchmark Reform―Phase 2 which amended
requirements in IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 relating to:
• changes in the basis for determining contractual cash flows of financial assets,
financial liabilities and lease liabilities;
• hedge accounting; and
• disclosures.
The Phase 2 amendments apply only to changes required by the interest rate benchmark
reform to financial instruments and hedging relationships.

Other Standards have made minor consequential amendments to IAS 39. They include
IAS 1 Presentation of Financial Statements (issued September 2007), IAS 27 Consolidated and
Separate Financial Statements (issued January 2008), Improvements to IFRSs (issued May 2008),
Eligible Hedged Items (Amendment to IAS 39 Financial Instruments: Recognition and
Measurement) (issued July 2008), Improvements to IFRSs (issued April 2009), IFRS 13 Fair Value
Measurement (issued May 2011), Investment Entities (Amendments to IFRS 10, IFRS 12 and
IAS 27) (issued October 2012), Novation of Derivatives and Continuation of Hedge Accounting
(Amendments to IAS 39) (issued June 2013), IFRS 9 Financial Instruments (Hedge Accounting
and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 15 Revenue
from Contracts with Customers (issued May 2014) and IFRS 9 Financial Instruments (issued July
2014).
In response to requests from interested parties that the accounting for financial
instruments should be improved quickly, the Board divided its project to replace IAS 39
into three main phases. As the Board completed each phase, it issued chapters in IFRS 9
that replaced the corresponding requirements in IAS 39. The Board had always intended
that IFRS 9 Financial Instruments would replace IAS 39 in its entirety. However, IFRS 9
permits an entity to choose as its accounting policy either to apply the hedge accounting
requirements of IFRS 9 or to continue to apply the hedge accounting requirements in
IAS 39. Consequently, although IFRS 9 is effective (with limited exceptions for entities
that issue insurance contracts and entities applying the IFRS for SMEs Standard), IAS 39,
which now contains only its requirements for hedge accounting, also remains effective.

International Accounting Standard 39 Financial Instruments: Recognition and
Measurement (IAS 39) is set out in paragraphs 2–110 and Appendices A and B. All the
paragraphs have equal authority but retain the IASC format of the Standard when it
was adopted by the IASB. IAS 39 should be read in the context of its objective and
the Basis for Conclusions, the Preface to IFRS Standards and the Conceptual Framework for
Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors provides a basis for selecting and applying accounting policies in the absence of
explicit guidance.

International Accounting Standard 39
Financial Instruments: Recognition and Measurement

[Deleted]

Scope

This Standard shall be applied by all entities to all financial instruments
within the scope of IFRS 9 Financial Instruments if, and to the extent that:
(a) IFRS 9 permits the hedge accounting requirements of this Standard
to be applied; and
(b) the financial instrument is part of a hedging relationship that
qualifies for hedge accounting in accordance with this Standard.
[Deleted]

Definitions

The terms defined in IFRS 13, IFRS 9 and IAS 32 are used in this Standard with
the meanings specified in Appendix A of IFRS 13, Appendix A of IFRS 9 and
paragraph 11 of IAS 32. IFRS 13, IFRS 9 and IAS 32 define the following terms:
• amortised cost of a financial asset or financial liability
• derecognition
• derivative
• effective interest method
• effective interest rate
• equity instrument
• fair value
• financial asset
• financial instrument
• financial liability
and provide guidance on applying those definitions.
The following terms are used in this Standard with the meanings specified:

Definitions relating to hedge accounting

A firm commitment is a binding agreement for the exchange of a specified
quantity of resources at a specified price on a specified future date or
dates.
A forecast transaction is an uncommitted but anticipated future transaction.

A hedging instrument is a designated derivative or (for a hedge of the risk of
changes in foreign currency exchange rates only) a designated
non-derivative financial asset or non-derivative financial liability whose fair
value or cash flows are expected to offset changes in the fair value or cash
flows of a designated hedged item (paragraphs 72–77 and Appendix A
paragraphs AG94–AG97 elaborate on the definition of a hedging
instrument).
A hedged item is an asset, liability, firm commitment, highly
probable forecast transaction or net investment in a foreign operation that
(a) exposes the entity to risk of changes in fair value or future cash flows
and (b) is designated as being hedged (paragraphs 78–84 and Appendix A
paragraphs AG98–AG101 elaborate on the definition of hedged items).
Hedge effectiveness is the degree to which changes in the fair value or cash
flows of the hedged item that are attributable to a hedged risk are offset by
changes in the fair value or cash flows of the hedging
instrument (see Appendix A paragraphs AG105–AG113A).
[Deleted]

Hedging

If an entity applies IFRS 9 and has not chosen as its accounting policy to
continue to apply the hedge accounting requirements of this Standard
(see paragraph 7.2.21 of IFRS 9), it shall apply the hedge accounting
requirements in Chapter 6 of IFRS 9. However, for a fair value hedge of the
interest rate exposure of a portion of a portfolio of financial assets or
financial liabilities, an entity may, in accordance with paragraph 6.1.3 of
IFRS 9, apply the hedge accounting requirements in this Standard instead
of those in IFRS 9. In that case the entity must also apply the specific
requirements for fair value hedge accounting for a portfolio hedge of
interest rate risk (see paragraphs 81A, 89A and AG114–AG132).

Hedging instruments
Qualifying instruments

This Standard does not restrict the circumstances in which a derivative may
be designated as a hedging instrument provided the conditions
in paragraph 88 are met, except for some written options (see Appendix A
paragraph AG94). However, a non-derivative financial asset or
non-derivative financial liability may be designated as a hedging instrument
only for a hedge of a foreign currency risk.
For hedge accounting purposes, only instruments that involve a party external
to the reporting entity (ie external to the group or individual entity that is
being reported on) can be designated as hedging instruments. Although
individual entities within a consolidated group or divisions within an entity
may enter into hedging transactions with other entities within the group or
divisions within the entity, any such intragroup transactions are eliminated
on consolidation. Therefore, such hedging transactions do not qualify for hedge accounting in the consolidated financial statements of the group.
However, they may qualify for hedge accounting in the individual or separate
financial statements of individual entities within the group provided that they
are external to the individual entity that is being reported on.

Designation of hedging instruments

There is normally a single fair value measure for a hedging instrument in its
entirety, and the factors that cause changes in fair value are co-dependent.
Thus, a hedging relationship is designated by an entity for a hedging
instrument in its entirety. The only exceptions permitted are:
(a) separating the intrinsic value and time value of an option contract and
designating as the hedging instrument only the change in intrinsic
value of an option and excluding change in its time value; and
(b) separating the interest element and the spot price of a forward
contract.
These exceptions are permitted because the intrinsic value of the option and
the premium on the forward can generally be measured separately. A dynamic
hedging strategy that assesses both the intrinsic value and time value of an
option contract can qualify for hedge accounting.
A proportion of the entire hedging instrument, such as 50 per cent of the
notional amount, may be designated as the hedging instrument in a hedging
relationship. However, a hedging relationship may not be designated for only
a portion of the time period during which a hedging instrument remains
outstanding.
A single hedging instrument may be designated as a hedge of more than one
type of risk provided that (a) the risks hedged can be identified clearly; (b)
the effectiveness of the hedge can be demonstrated; and (c) it is possible to
ensure that there is specific designation of the hedging instrument and
different risk positions.
Two or more derivatives, or proportions of them (or, in the case of a hedge
of currency risk, two or more non-derivatives or proportions of them, or a
combination of derivatives and non-derivatives or proportions of them), may
be viewed in combination and jointly designated as the hedging instrument,
including when the risk(s) arising from some derivatives offset(s) those arising
from others. However, an interest rate collar or other derivative instrument
that combines a written option and a purchased option does not qualify as a
hedging instrument if it is, in effect, a net written option (for which a net
premium is received). Similarly, two or more instruments (or proportions of
them) may be designated as the hedging instrument only if none of them is a
written option or a net written option.

Hedged items
Qualifying items

A hedged item can be a recognized asset or liability, an unrecognized firm
commitment, a highly probable forecast transaction or a net investment in a
foreign operation. The hedged item can be (a) a single asset, liability, firm
commitment, highly probable forecast transaction or net investment in a
foreign operation, (b) a group of assets, liabilities, firm commitments, highly
probable forecast transactions or net investments in foreign operations with
similar risk characteristics or (c) in a portfolio hedge of interest rate risk only,
a portion of the portfolio of financial assets or financial liabilities that share
the risk being hedged.
[Deleted]
For hedge accounting purposes, only assets, liabilities, firm commitments or
highly probable forecast transactions that involve a party external to the
entity can be designated as hedged items. It follows that hedge accounting can
be applied to transactions between entities in the same group only in the
individual or separate financial statements of those entities and not in the
consolidated financial statements of the group, except for the consolidated
financial statements of an investment entity, as defined in IFRS 10, where
transactions between an investment entity and its subsidiaries measured at
fair value through profit or loss will not be eliminated in the consolidated
financial statements. As an exception, the foreign currency risk of an
intragroup monetary item (eg a payable/receivable between two subsidiaries)
may qualify as a hedged item in the consolidated financial statements if it
results in an exposure to foreign exchange rate gains or losses that are not
fully eliminated on consolidation in accordance with IAS 21 The Effects of
Changes in Foreign Exchange Rates. In accordance with IAS 21, foreign exchange
rate gains and losses on intragroup monetary items are not fully eliminated
on consolidation when the intragroup monetary item is transacted between
two group entities that have different functional currencies. In addition, the
foreign currency risk of a highly probable forecast intragroup transaction may
qualify as a hedged item in consolidated financial statements provided that
the transaction is denominated in a currency other than the functional
currency of the entity entering into that transaction and the foreign currency
risk will affect consolidated profit or loss.

Designation of financial items as hedged items

If the hedged item is a financial asset or financial liability, it may be a hedged
item with respect to the risks associated with only a portion of its cash flows
or fair value (such as one or more selected contractual cash flows or portions
of them or a percentage of the fair value) provided that effectiveness can be
measured. For example, an identifiable and separately measurable portion of
the interest rate exposure of an interest-bearing asset or interest-bearing
liability may be designated as the hedged risk (such as a risk-free interest rate
or benchmark interest rate component of the total interest rate exposure of a
hedged financial instrument).

In a fair value hedge of the interest rate exposure of a portfolio of financial
assets or financial liabilities (and only in such a hedge), the portion hedged
may be designated in terms of an amount of a currency (eg an amount of
dollars, euro, pounds or rand) rather than as individual assets (or liabilities).
Although the portfolio may, for risk management purposes, include assets and
liabilities, the amount designated is an amount of assets or an amount of
liabilities. Designation of a net amount including assets and liabilities is not
permitted. The entity may hedge a portion of the interest rate risk associated
with this designated amount. For example, in the case of a hedge of a portfolio
containing prepayable assets, the entity may hedge the change in fair
value that is attributable to a change in the hedged interest rate on the basis
of expected, rather than contractual, repricing dates. When the portion
hedged is based on expected repricing dates, the effect that changes in the
hedged interest rate have on those expected repricing dates shall be included
when determining the change in the fair value of the hedged item.
Consequently, if a portfolio that contains prepayable items is hedged with a
non-prepayable derivative, ineffectiveness arises if the dates on which items in
the hedged portfolio are expected to prepay are revised, or actual prepayment
dates differ from those expected.

Designation of non-financial items as hedged items

If the hedged item is a non-financial asset or non-financial liability, it shall
be designated as a hedged item (a) for foreign currency risks, or (b) in its
entirety for all risks, because of the difficulty of isolating and measuring
the appropriate portion of the cash flows or fair value changes attributable
to specific risks other than foreign currency risks.

Designation of groups of items as hedged items

Similar assets or similar liabilities shall be aggregated and hedged as a group
only if the individual assets or individual liabilities in the group share the risk
exposure that is designated as being hedged. Furthermore, the change in fair
value attributable to the hedged risk for each individual item in the group
shall be expected to be approximately proportional to the overall change in
fair value attributable to the hedged risk of the group of items.
Because an entity assesses hedge effectiveness by comparing the change in
the fair value or cash flow of a hedging instrument (or group of similar
hedging instruments) and a hedged item (or group of similar hedged items),
comparing a hedging instrument with an overall net position (eg the net of all
fixed rate assets and fixed rate liabilities with similar maturities), rather than
with a specific hedged item, does not qualify for hedge accounting.

Hedge accounting

Hedge accounting recognises the offsetting effects on profit or loss of changes
in the fair values of the hedging instrument and the hedged item.

Hedging relationships are of three types:
(a) fair value hedge: a hedge of the exposure to changes in fair value of a
recognised asset or liability or an unrecognised firm commitment,
or an identified portion of such an asset, liability or firm
commitment, that is attributable to a particular risk and could
affect profit or loss.
(b) cash flow hedge: a hedge of the exposure to variability in cash flows
that (i) is attributable to a particular risk associated with a
recognised asset or liability (such as all or some future interest
payments on variable rate debt) or a highly probable forecast
transaction and (ii) could affect profit or loss.
(c) hedge of a net investment in a foreign operation as defined in IAS 21.
A hedge of the foreign currency risk of a firm commitment may be accounted
for as a fair value hedge or as a cash flow hedge.
A hedging relationship qualifies for hedge accounting under paragraphs
89–102 if, and only if, all of the following conditions are met.
(a) At the inception of the hedge there is formal designation and
documentation of the hedging relationship and the entity’s risk
management objective and strategy for undertaking the hedge. That
documentation shall include identification of the hedging
instrument, the hedged item or transaction, the nature of the risk
being hedged and how the entity will assess the hedging
instrument’s effectiveness in offsetting the exposure to changes in
the hedged item’s fair value or cash flows attributable to the hedged
risk.
(b) The hedge is expected to be highly effective (see Appendix A
paragraphs AG105–AG113A) in achieving offsetting changes in fair
value or cash flows attributable to the hedged risk, consistently
with the originally documented risk management strategy for that
particular hedging relationship.
(c) For cash flow hedges, a forecast transaction that is the subject of
the hedge must be highly probable and must present an exposure to
variations in cash flows that could ultimately affect profit or loss.
(d) The effectiveness of the hedge can be reliably measured, ie the fair
value or cash flows of the hedged item that are attributable to the
hedged risk and the fair value of the hedging instrument can be
reliably measured.
(e) The hedge is assessed on an ongoing basis and determined actually
to have been highly effective throughout the financial reporting
periods for which the hedge was designated.

Fair value hedges

If a fair value hedge meets the conditions in paragraph 88 during the
period, it shall be accounted for as follows:
(a) the gain or loss from remeasuring the hedging instrument at fair
value (for a derivative hedging instrument) or the foreign currency
component of its carrying amount measured in accordance
with IAS 21 (for a non-derivative hedging instrument) shall be
recognised in profit or loss; and
(b) the gain or loss on the hedged item attributable to the hedged risk
shall adjust the carrying amount of the hedged item and be
recognised in profit or loss. This applies if the hedged item is
otherwise measured at cost. Recognition of the gain or loss
attributable to the hedged risk in profit or loss applies if the hedged
item is a financial asset measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A of
IFRS 9.
For a fair value hedge of the interest rate exposure of a portion of a portfolio
of financial assets or financial liabilities (and only in such a hedge), the
requirement in paragraph 89(b) may be met by presenting the gain or loss
attributable to the hedged item either:
(a) in a single separate line item within assets, for those repricing time
periods for which the hedged item is an asset; or
(b) in a single separate line item within liabilities, for those repricing time
periods for which the hedged item is a liability.
The separate line items referred to in (a) and (b) above shall be presented next
to financial assets or financial liabilities. Amounts included in these line items
shall be removed from the statement of financial position when the assets or
liabilities to which they relate are derecognised.
If only particular risks attributable to a hedged item are hedged, recognised
changes in the fair value of the hedged item unrelated to the hedged risk are
recognised as set out in paragraph 5.7.1 of IFRS 9.
An entity shall discontinue prospectively the hedge accounting specified in
paragraph 89 if:
(a) the hedging instrument expires or is sold, terminated or exercised.
For this purpose, the replacement or rollover of a hedging
instrument into another hedging instrument is not an expiration or
termination if such replacement or rollover is part of the entity’s
documented hedging strategy. Additionally, for this purpose there
is not an expiration or termination of the hedging instrument if:
(i) as a consequence of laws or regulations or the introduction
of laws or regulations, the parties to the hedging instrument
agree that one or more clearing counterparties replace their
original counterparty to become the new counterparty to

each of the parties. For this purpose, a clearing counterparty
is a central counterparty (sometimes called a ‘clearing
organisation’ or ‘clearing agency’) or an entity or entities, for
example, a clearing member of a clearing organisation or a
client of a clearing member of a clearing organisation, that
are acting as counterparty in order to effect clearing by a
central counterparty. However, when the parties to the
hedging instrument replace their original counterparties
with different counterparties this paragraph shall apply only
if each of those parties effects clearing with the same central
counterparty.
(ii) other changes, if any, to the hedging instrument are limited
to those that are necessary to effect such a replacement of
the counterparty. Such changes are limited to those that are
consistent with the terms that would be expected if the
hedging instrument were originally cleared with the clearing
counterparty. These changes include changes in the
collateral requirements, rights to offset receivables and
payables balances, and charges levied.

(b) the hedge no longer meets the criteria for hedge accounting in
paragraph 88; or
(c) the entity revokes the designation.
Any adjustment arising from paragraph 89(b) to the carrying amount of a
hedged financial instrument for which the effective interest method is
used (or, in the case of a portfolio hedge of interest rate risk, to the
separate line item in the statement of financial position described
in paragraph 89A) shall be amortised to profit or loss. Amortisation may
begin as soon as an adjustment exists and shall begin no later than when
the hedged item ceases to be adjusted for changes in its fair
value attributable to the risk being hedged. The adjustment is based on a
recalculated effective interest rate at the date amortisation begins.
However, if, in the case of a fair value hedge of the interest rate exposure
of a portfolio of financial assets or financial liabilities (and only in such a
hedge), amortising using a recalculated effective interest rate is not
practicable, the adjustment shall be amortised using a straight-line
method. The adjustment shall be amortised fully by maturity of
the financial instrument or, in the case of a portfolio hedge of interest rate
risk, by expiry of the relevant repricing time period.
When an unrecognised firm commitment is designated as a hedged item, the
subsequent cumulative change in the fair value of the firm commitment
attributable to the hedged risk is recognised as an asset or liability with a
corresponding gain or loss recognised in profit or loss (see paragraph 89(b)).
The changes in the fair value of the hedging instrument are also recognised in
profit or loss.

When an entity enters into a firm commitment to acquire an asset or assume
a liability that is a hedged item in a fair value hedge, the initial carrying
amount of the asset or liability that results from the entity meeting the firm
commitment is adjusted to include the cumulative change in the fair value of
the firm commitment attributable to the hedged risk that was recognized in
the statement of financial position.

Cash flow hedges

If a cash flow hedge meets the conditions in paragraph 88 during the
period, it shall be accounted for as follows:
(a) the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge (see paragraph 88) shall be
recognised in other comprehensive income; and
(b) the ineffective portion of the gain or loss on the hedging instrument
shall be recognised in profit or loss.
More specifically, a cash flow hedge is accounted for as follows:
(a) the separate component of equity associated with the hedged item is
adjusted to the lesser of the following (in absolute amounts):
(i) the cumulative gain or loss on the hedging instrument from
inception of the hedge; and
(ii) the cumulative change in fair value (present value) of the
expected future cash flows on the hedged item from inception
of the hedge;

(b) any remaining gain or loss on the hedging instrument or designated
component of it (that is not an effective hedge) is recognised in profit
or loss; and
(c) if an entity’s documented risk management strategy for a particular
hedging relationship excludes from the assessment of hedge
effectiveness a specific component of the gain or loss or related cash
flows on the hedging instrument (see paragraphs 74, 75 and 88(a)), that
excluded component of gain or loss is recognised in accordance
with paragraph 5.7.1 of IFRS 9.
If a hedge of a forecast transaction subsequently results in the recognition
of a financial asset or a financial liability, the associated gains or losses that
were recognised in other comprehensive income in accordance
with paragraph 95 shall be reclassified from equity to profit or loss as a
reclassification adjustment (see IAS 1 (as revised in 2007)) in the same
period or periods during which the hedged forecast cash flows affect profit
or loss (such as in the periods that interest income or interest expense is
recognised). However, if an entity expects that all or a portion of a loss
recognised in other comprehensive income will not be recovered in one or
more future periods, it shall reclassify into profit or loss as a
reclassification adjustment the amount that is not expected to be
recovered.

If a hedge of a forecast transaction subsequently results in the recognition
of a non-financial asset or a non-financial liability, or a forecast transaction
for a non-financial asset or non-financial liability becomes a firm
commitment for which fair value hedge accounting is applied, then the
entity shall adopt (a) or (b) below:
(a) It reclassifies the associated gains and losses that were recognised in
other comprehensive income in accordance with paragraph 95 to
profit or loss as a reclassification adjustment (see IAS 1 (revised
2007)) in the same period or periods during which the asset acquired
or liability assumed affects profit or loss (such as in the periods that
depreciation expense or cost of sales is recognised). However, if an
entity expects that all or a portion of a loss recognised in other
comprehensive income will not be recovered in one or more future
periods, it shall reclassify from equity to profit or loss as a
reclassification adjustment the amount that is not expected to be
recovered.
(b) It removes the associated gains and losses that were recognised in
other comprehensive income in accordance with paragraph 95, and
includes them in the initial cost or other carrying amount of the
asset or liability.
An entity shall adopt either (a) or (b) in paragraph 98 as its accounting
policy and shall apply it consistently to all hedges to which paragraph 98
relates.
For cash flow hedges other than those covered by paragraphs 97 and 98,
amounts that had been recognised in other comprehensive income shall be
reclassified from equity to profit or loss as a reclassification adjustment
(see IAS 1 (revised 2007)) in the same period or periods during which the
hedged forecast cash flows affect profit or loss (for example, when a
forecast sale occurs).
In any of the following circumstances an entity shall discontinue
prospectively the hedge accounting specified in paragraphs 95–100:
(a) The hedging instrument expires or is sold, terminated or exercised.
In this case, the cumulative gain or loss on the hedging instrument
that has been recognised in other comprehensive income from the
period when the hedge was effective (see paragraph 95(a)) shall
remain separately in equity until the forecast transaction occurs.
When the transaction occurs, paragraph 97, 98 or 100 applies. For
the purpose of this subparagraph, the replacement or rollover of a
hedging instrument into another hedging instrument is not an
expiration or termination if such replacement or rollover is part of
the entity’s documented hedging strategy. Additionally, for the
purpose of this subparagraph there is not an expiration or
termination of the hedging instrument if:

(i) as a consequence of laws or regulations or the introduction
of laws or regulations, the parties to the hedging instrument
agree that one or more clearing counterparties replace their
original counterparty to become the new counterparty to
each of the parties. For this purpose, a clearing counterparty
is a central counterparty (sometimes called a ‘clearing
organisation’ or ‘clearing agency’) or an entity or entities, for
example, a clearing member of a clearing organisation or a
client of a clearing member of a clearing organisation, that
are acting as counterparty in order to effect clearing by a
central counterparty. However, when the parties to the
hedging instrument replace their original counterparties
with different counterparties this paragraph shall apply only
if each of those parties effects clearing with the same central
counterparty.
(ii) other changes, if any, to the hedging instrument are limited
to those that are necessary to effect such a replacement of
the counterparty. Such changes are limited to those that are
consistent with the terms that would be expected if the
hedging instrument were originally cleared with the clearing
counterparty. These changes include changes in the
collateral requirements, rights to offset receivables and
payables balances, and charges levied.

(b) The hedge no longer meets the criteria for hedge accounting
in paragraph 88. In this case, the cumulative gain or loss on the
hedging instrument that has been recognised in other
comprehensive income from the period when the hedge was
effective (see paragraph 95(a)) shall remain separately in equity until
the forecast transaction occurs. When the transaction
occurs, paragraph 97, 98 or 100 applies.
(c) The forecast transaction is no longer expected to occur, in which
case any related cumulative gain or loss on the hedging instrument
that has been recognised in other comprehensive income from the
period when the hedge was effective (see paragraph 95(a)) shall be
reclassified from equity to profit or loss as a reclassification
adjustment. A forecast transaction that is no longer highly probable
(see paragraph 88(c)) may still be expected to occur.
(d) The entity revokes the designation. For hedges of a forecast
transaction, the cumulative gain or loss on the hedging instrument
that has been recognised in other comprehensive income from the
period when the hedge was effective (see paragraph 95(a)) shall
remain separately in equity until the forecast transaction occurs or
is no longer expected to occur. When the transaction
occurs, paragraph 97, 98 or 100 applies. If the transaction is no
longer expected to occur, the cumulative gain or loss that had been
recognised in other comprehensive income shall be reclassified
from equity to profit or loss as a reclassification adjustment.

Hedges of a net investment

Hedges of a net investment in a foreign operation, including a hedge of a
monetary item that is accounted for as part of the net investment
(see IAS 21), shall be accounted for similarly to cash flow hedges:
(a) the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge (see paragraph 88) shall be
recognised in other comprehensive income; and
(b) the ineffective portion shall be recognised in profit or loss.
The gain or loss on the hedging instrument relating to the effective portion
of the hedge that has been recognised in other comprehensive income shall
be reclassified from equity to profit or loss as a reclassification adjustment
(see IAS 1 (revised 2007)) in accordance with paragraphs 48–49 of IAS 21 on
the disposal or partial disposal of the foreign operation.

Temporary exceptions from applying specific hedge
accounting requirements

An entity shall apply paragraphs 102D–102N and 108G to all hedging
relationships directly affected by interest rate benchmark reform. These
paragraphs apply only to such hedging relationships. A hedging relationship is
directly affected by interest rate benchmark reform only if the reform gives
rise to uncertainties about:
(a) the interest rate benchmark (contractually or non-contractually
specified) designated as a hedged risk; and/or
(b) the timing or the amount of interest rate benchmark-based cash flows
of the hedged item or of the hedging instrument.
For the purpose of applying paragraphs 102D–102N, the term ‘interest rate
benchmark reform’ refers to the market-wide reform of an interest rate
benchmark, including the replacement of an interest rate benchmark with an
alternative benchmark rate such as that resulting from the recommendations
set out in the Financial Stability Board’s July 2014 report ‘Reforming Major
Interest Rate Benchmarks’.2
Paragraphs 102D–102N provide exceptions only to the requirements specified
in these paragraphs. An entity shall continue to apply all other hedge
accounting requirements to hedging relationships directly affected by interest
rate benchmark reform.

Highly probable requirement for cash flow hedges

For the purpose of applying the requirement in paragraph 88(c) that a forecast
transaction must be highly probable, an entity shall assume that the interest rate benchmark on which the hedged cash flows (contractually or non-
contractually specified) are based is not altered as a result of interest rate benchmark reform.

Reclassifying the cumulative gain or loss recognised in other
comprehensive income

For the purpose of applying the requirement in paragraph 101(c) in order to
determine whether the forecast transaction is no longer expected to occur, an
entity shall assume that the interest rate benchmark on which the hedged
cash flows (contractually or non-contractually specified) are based is not
altered as a result of interest rate benchmark reform.

Effectiveness assessment

For the purpose of applying the requirements in paragraphs
88(b) and AG105(a), an entity shall assume that the interest rate benchmark

on which the hedged cash flows and/or the hedged risk (contractually or non-
contractually specified) are based, or the interest rate benchmark on which

the cash flows of the hedging instrument are based, is not altered as a result
of interest rate benchmark reform.
For the purpose of applying the requirement in paragraph 88(e), an entity is
not required to discontinue a hedging relationship because the actual results
of the hedge do not meet the requirements in paragraph AG105(b). For the
avoidance of doubt, an entity shall apply the other conditions in paragraph 88,
including the prospective assessment in paragraph 88(b), to assess whether the
hedging relationship must be discontinued.

Designating financial items as hedged items

Unless paragraph 102I applies, for a hedge of a non-contractually specified
benchmark portion of interest rate risk, an entity shall apply the requirement
in paragraphs 81 and AG99F—that the designated portion shall be separately
identifiable—only at the inception of the hedging relationship.
When an entity, consistent with its hedge documentation, frequently resets (ie
discontinues and restarts) a hedging relationship because both the hedging
instrument and the hedged item frequently change (ie the entity uses a
dynamic process in which both the hedged items and the hedging instruments
used to manage that exposure do not remain the same for long), the entity
shall apply the requirement in paragraphs 81 and AG99F—that the designated
portion is separately identifiable—only when it initially designates a hedged
item in that hedging relationship. A hedged item that has been assessed at the
time of its initial designation in the hedging relationship, whether it was at
the time of the hedge inception or subsequently, is not reassessed at any
subsequent redesignation in the same hedging relationship.

End of application

An entity shall prospectively cease applying paragraph 102D to a hedged item
at the earlier of:
(a) when the uncertainty arising from interest rate benchmark reform is
no longer present with respect to the timing and the amount of the
interest rate benchmark-based cash flows of the hedged item; and

(b) when the hedging relationship that the hedged item is part of is
discontinued.
An entity shall prospectively cease applying paragraph 102E at the earlier of:
(a) when the uncertainty arising from interest rate benchmark reform is
no longer present with respect to the timing and the amount of the
interest rate benchmark-based future cash flows of the hedged item;
and
(b) when the entire cumulative gain or loss recognised in other
comprehensive income with respect to that discontinued hedging
relationship has been reclassified to profit or loss.
An entity shall prospectively cease applying paragraph 102F:
(a) to a hedged item, when the uncertainty arising from interest rate
benchmark reform is no longer present with respect to the hedged risk
or the timing and the amount of the interest rate benchmark-based
cash flows of the hedged item; and
(b) to a hedging instrument, when the uncertainty arising from interest
rate benchmark reform is no longer present with respect to the timing
and the amount of the interest rate benchmark-based cash flows of the
hedging instrument.
If the hedging relationship that the hedged item and the hedging
instrument are part of is discontinued earlier than the date specified
in paragraph 102L(a) or the date specified in paragraph 102L(b), the entity
shall prospectively cease applying paragraph 102F to that hedging relationship
at the date of discontinuation.
An entity shall prospectively cease applying paragraph 102G to a hedging
relationship at the earlier of:
(a) when the uncertainty arising from interest rate benchmark reform is
no longer present with respect to the hedged risk and the timing and
the amount of the interest rate benchmark-based cash flows of the
hedged item and of the hedging instrument; and
(b) when the hedging relationship to which the exception is applied is
discontinued.
When designating a group of items as the hedged item, or a combination of
financial instruments as the hedging instrument, an entity shall prospectively
cease applying paragraphs 102D–102G to an individual item or financial
instrument in accordance with paragraphs 102J, 102K, 102L, or 102M, as
relevant, when the uncertainty arising from interest rate benchmark reform is
no longer present with respect to the hedged risk and/or the timing and the
amount of the interest rate benchmark-based cash flows of that item or
financial instrument.

An entity shall prospectively cease applying paragraphs 102H and 102I at the
earlier of:
(a) when changes required by interest rate benchmark reform are made to
the non-contractually specified risk portion applying paragraph 102P;
or
(b) when the hedging relationship in which the non-contractually
specified risk portion is designated is discontinued.

Additional temporary exceptions arising from interest
rate benchmark reform
Hedge accounting

As and when the requirements in paragraphs 102D–102I cease to apply to a
hedging relationship (see paragraphs 102J–102O), an entity shall amend the
formal designation of that hedging relationship as previously documented to
reflect the changes required by interest rate benchmark reform, ie the
changes are consistent with the requirements in paragraphs 5.4.6–5.4.8 of
IFRS 9. In this context, the hedge designation shall be amended only to make
one or more of these changes:

(a) designating an alternative benchmark rate (contractually or non-
contractually specified) as a hedged risk;

(b) amending the description of the hedged item, including the
description of the designated portion of the cash flows or fair value
being hedged;
(c) amending the description of the hedging instrument; or
(d) amending the description of how the entity will assess hedge
effectiveness.
An entity also shall apply the requirement in paragraph 102P(c) if these three
conditions are met:
(a) the entity makes a change required by interest rate benchmark reform
using an approach other than changing the basis for determining the
contractual cash flows of the hedging instrument (as described
in paragraph 5.4.6 of IFRS 9);
(b) the original hedging instrument is not derecognised; and
(c) the chosen approach is economically equivalent to changing the basis
for determining the contractual cash flows of the original hedging
instrument (as described in paragraphs 5.4.7 and 5.4.8 of IFRS 9).
The requirements in paragraphs 102D–102I may cease to apply at different
times. Therefore, applying paragraph 102P, an entity may be required to
amend the formal designation of its hedging relationships at different times,
or may be required to amend the formal designation of a hedging relationship
more than once. When, and only when, such a change is made to the hedge
designation, an entity shall apply paragraphs 102V–102Z2 as applicable. An entity also shall apply paragraph 89 (for a fair value hedge) or paragraph 96
(for a cash flow hedge) to account for any changes in the fair value of the
hedged item or the hedging instrument.
An entity shall amend a hedging relationship as required in paragraph 102P
by the end of the reporting period during which a change required by interest
rate benchmark reform is made to the hedged risk, hedged item or hedging
instrument. For the avoidance of doubt, such an amendment to the formal
designation of a hedging relationship constitutes neither the discontinuation
of the hedging relationship nor the designation of a new hedging relationship.
If changes are made in addition to those changes required by interest rate
benchmark reform to the financial asset or financial liability designated in a
hedging relationship (as described in paragraphs 5.4.6–5.4.8 of IFRS 9) or to
the designation of the hedging relationship (as required by paragraph 102P),
an entity shall first apply the applicable requirements in this Standard to
determine if those additional changes result in the discontinuation of hedge
accounting. If the additional changes do not result in the discontinuation of
hedge accounting, an entity shall amend the formal designation of the
hedging relationship as specified in paragraph 102P.
Paragraphs 102V–102Z3 provide exceptions to the requirements specified in
those paragraphs only. An entity shall apply all other hedge accounting
requirements in this Standard, including the qualifying criteria in
paragraph 88, to hedging relationships that were directly affected by interest
rate benchmark reform.

Accounting for qualifying hedging relationships

Retrospective effectiveness assessment
For the purpose of assessing the retrospective effectiveness of a hedging
relationship on a cumulative basis applying paragraph 88(e) and only for this
purpose, an entity may elect to reset to zero the cumulative fair value changes
of the hedged item and hedging instrument when ceasing to apply
paragraph 102G as required by paragraph 102M. This election is made
separately for each hedging relationship (ie on an individual hedging
relationship basis).
Cash flow hedges
For the purpose of applying paragraph 97, at the point when an entity amends
the description of a hedged item as required in paragraph 102P(b), the
cumulative gain or loss in other comprehensive income shall be deemed to be
based on the alternative benchmark rate on which the hedged future cash
flows are determined.
For a discontinued hedging relationship, when the interest rate benchmark on
which the hedged future cash flows had been based is changed as required by
interest rate benchmark reform, for the purpose of applying paragraph 101(c)
in order to determine whether the hedged future cash flows are expected to
occur, the amount accumulated in other comprehensive income for that

hedging relationship shall be deemed to be based on the alternative
benchmark rate on which the hedged future cash flows will be based.

Groups of items

When an entity applies paragraph 102P to groups of items designated as
hedged items in a fair value or cash flow hedge, the entity shall allocate the
hedged items to subgroups based on the benchmark rate being hedged and
designate the benchmark rate as the hedged risk for each subgroup. For
example, in a hedging relationship in which a group of items is hedged for
changes in an interest rate benchmark subject to interest rate benchmark
reform, the hedged cash flows or fair value of some items in the group could
be changed to reference an alternative benchmark rate before other items in
the group are changed. In this example, in applying paragraph 102P, the
entity would designate the alternative benchmark rate as the hedged risk for
that relevant subgroup of hedged items. The entity would continue to
designate the existing interest rate benchmark as the hedged risk for the
other subgroup of hedged items until the hedged cash flows or fair value of
those items are changed to reference the alternative benchmark rate or the
items expire and are replaced with hedged items that reference the alternative
benchmark rate.
An entity shall assess separately whether each subgroup meets the
requirements in paragraphs 78 and 83 to be an eligible hedged item. If any
subgroup fails to meet the requirements in paragraphs 78 and 83, the entity
shall discontinue hedge accounting prospectively for the hedging relationship
in its entirety. An entity also shall apply the requirements in paragraphs 89 or
96 to account for ineffectiveness related to the hedging relationship in its
entirety.

Designating financial items as hedged items

An alternative benchmark rate designated as a non-contractually specified risk
portion that is not separately identifiable (see paragraphs 81 and AG99F) at the
date it is designated shall be deemed to have met that requirement at that
date, if, and only if, the entity reasonably expects the alternative benchmark
rate will be separately identifiable within 24 months. The 24-month period
applies to each alternative benchmark rate separately and starts from the date
the entity designates the alternative benchmark rate as a non-contractually
specified risk portion for the first time (ie the 24-month period applies on a
rate-by-rate basis).
If subsequently an entity reasonably expects that the alternative benchmark
rate will not be separately identifiable within 24 months from the date the
entity designated it as a non-contractually specified risk portion for the first
time, the entity shall cease applying the requirement in paragraph 102Z1 to
that alternative benchmark rate and discontinue hedge accounting
prospectively from the date of that reassessment for all hedging relationships

in which the alternative benchmark rate was designated as a non-
contractually specified risk portion.

In addition to those hedging relationships specified in paragraph 102P, an
entity shall apply the requirements in paragraphs 102Z1 and 102Z2 to new
hedging relationships in which an alternative benchmark rate is designated as
a non-contractually specified risk portion (see paragraphs 81 and AG99F)
when, because of interest rate benchmark reform, that risk portion is not
separately identifiable at the date it is designated.

Effective date and transition

An entity shall apply this Standard (including the amendments issued in
March 2004) for annual periods beginning on or after 1 January 2005. Earlier
application is permitted. An entity shall not apply this Standard (including the
amendments issued in March 2004) for annual periods beginning before
1 January 2005 unless it also applies IAS 32 (issued December 2003). If an
entity applies this Standard for a period beginning before 1 January 2005, it
shall disclose that fact.
[Deleted]
[Deleted]
IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraphs 95(a), 97, 98, 100, 102, 108 and AG99B. An
entity shall apply those amendments for annual periods beginning on or after
1 January 2009. If an entity applies IAS 1 (revised 2007) for an earlier period,
the amendments shall be applied for that earlier period.
[Deleted]
IAS 27 (as amended in 2008) amended paragraph 102. An entity shall apply
that amendment for annual periods beginning on or after 1 July 2009. If an
entity applies IAS 27 (amended 2008) for an earlier period, the amendment
shall be applied for that earlier period.
[Deleted]
An entity shall apply paragraphs AG99BA, AG99E, AG99F, AG110A and
AG110B retrospectively for annual periods beginning on or after 1 July 2009,
in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors. Earlier application is permitted. If an entity applies Eligible Hedged Items
(Amendment to IAS 39) for periods beginning before 1 July 2009, it shall
disclose that fact.
[Deleted]
Improvements to IFRSs issued in April 2009 amended paragraphs 2(g), 97 and
100. An entity shall apply the amendments to those paragraphs prospectively
to all unexpired contracts for annual periods beginning on or after 1 January
2010. Earlier application is permitted. If an entity applies the amendments for
an earlier period it shall disclose that fact.
[Deleted]

IFRS 13, issued in May 2011, amended paragraphs 9, 13, 28, 47, 88, AG46,
AG52, AG64, AG76, AG76A, AG80, AG81 and AG96, added paragraph 43A and
deleted paragraphs 48–49, AG69–AG75, AG77–AG79 and AG82. An entity shall
apply those amendments when it applies IFRS 13.
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), issued in
October 2012, amended paragraphs 2 and 80. An entity shall apply those
amendments for annual periods beginning on or after 1 January 2014. Earlier
application of Investment Entities is permitted. If an entity applies those
amendments earlier it shall also apply all amendments included in Investment
Entities at the same time.
[Deleted]
IFRS 15 Revenue from Contracts with Customers, issued in May 2014,
amended paragraphs 2, 9, 43, 47, 55, AG2, AG4 and AG48 and
added paragraphs 2A, 44A, 55A and AG8A–AG8C. An entity shall apply those
amendments when it applies IFRS 15.
IFRS 9, as issued in July 2014, amended paragraphs 2, 8, 9, 71, 88–90, 96,
AG95, AG114, AG118 and the headings above AG133 and deleted paragraphs 1,
4–7, 10–70, 79, 103B, 103D, 103F, 103H–103J, 103L–103P, 103S, 105–107A,
108E–108F, AG1–AG93 and AG96. An entity shall apply those amendments
when it applies IFRS 9.
[This paragraph was added for an entity that had not adopted IFRS 9.]
This Standard shall be applied retrospectively except as specified in
paragraph 108. The opening balance of retained earnings for the earliest prior
period presented and all other comparative amounts shall be adjusted as if
this Standard had always been in use unless restating the information would
be impracticable. If restatement is impracticable, the entity shall disclose that
fact and indicate the extent to which the information was restated.
[Deleted]
An entity shall not adjust the carrying amount of non-financial assets and
non-financial liabilities to exclude gains and losses related to cash flow hedges
that were included in the carrying amount before the beginning of the
financial year in which this Standard is first applied. At the beginning of the
financial period in which this Standard is first applied, any amount recognised
outside profit or loss (in other comprehensive income or directly in equity) for
a hedge of a firm commitment that under this Standard is accounted for as a
fair value hedge shall be reclassified as an asset or liability, except for a hedge
of foreign currency risk that continues to be treated as a cash flow hedge.
An entity shall apply the last sentence of paragraph 80, and paragraphs
AG99A and AG99B, for annual periods beginning on or after 1 January 2006.
Earlier application is encouraged. If an entity has designated as the hedged
item an external forecast transaction that
(a) is denominated in the functional currency of the entity entering into
the transaction,

(b) gives rise to an exposure that will have an effect on consolidated profit
or loss (ie is denominated in a currency other than the group’s
presentation currency), and
(c) would have qualified for hedge accounting had it not been
denominated in the functional currency of the entity entering into it,
it may apply hedge accounting in the consolidated financial statements in the
period(s) before the date of application of the last sentence of paragraph 80,
and paragraphs AG99A and AG99B.
An entity need not apply paragraph AG99B to comparative information
relating to periods before the date of application of the last sentence of
paragraph 80 and paragraph AG99A.
Paragraphs 73 and AG8 were amended by Improvements to IFRSs, issued in
May 2008. Paragraph 80 was amended by Improvements to IFRSs, issued in
April 2009. An entity shall apply those amendments for annual periods
beginning on or after 1 January 2009. Earlier application of all the
amendments is permitted. If an entity applies the amendments for an earlier
period it shall disclose that fact.
Novation of Derivatives and Continuation of Hedge Accounting (Amendments to
IAS 39), issued in June 2013, amended paragraphs 91 and 101 and
added paragraph AG113A. An entity shall apply those paragraphs for annual
periods beginning on or after 1 January 2014. An entity shall apply those
amendments retrospectively in accordance with IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors. Earlier application is permitted. If an
entity applies those amendments for an earlier period it shall disclose that
fact.
[Deleted]
Interest Rate Benchmark Reform, which amended IFRS 9, IAS 39 and IFRS 7, issued
in September 2019, added paragraphs 102A–102N. An entity shall apply these
amendments for annual periods beginning on or after 1 January 2020. Earlier
application is permitted. If an entity applies these amendments for an earlier
period, it shall disclose that fact. An entity shall apply these amendments
retrospectively to those hedging relationships that existed at the beginning of
the reporting period in which an entity first applies these amendments or
were designated thereafter, and to the gain or loss recognised in other
comprehensive income that existed at the beginning of the reporting period in
which an entity first applies these amendments.
Interest Rate Benchmark Reform—Phase 2, which amended IFRS 9, IAS 39, IFRS 7,
IFRS 4 and IFRS 16, issued in August 2020, added paragraphs 102O–102Z3 and
108I–108K, and amended paragraph 102M. An entity shall apply these
amendments for annual periods beginning on or after 1 January 2021. Earlier
application is permitted. If an entity applies these amendments for an earlier
period, it shall disclose that fact. An entity shall apply these amendments
retrospectively in accordance with IAS 8, except as specified in paragraphs
108I–108K.

An entity shall designate a new hedging relationship (for example, as
described in paragraph 102Z3) only prospectively (ie an entity is prohibited
from designating a new hedge accounting relationship in prior periods).
However, an entity shall reinstate a discontinued hedging relationship if, and
only if, these conditions are met:
(a) the entity had discontinued that hedging relationship solely due to
changes required by interest rate benchmark reform and the entity
would not have been required to discontinue that hedging relationship
if these amendments had been applied at that time; and
(b) at the beginning of the reporting period in which an entity first applies
these amendments (date of initial application of these amendments),
that discontinued hedging relationship meets the qualifying criteria
for hedge accounting (after taking into account these amendments).
If, in applying paragraph 108I, an entity reinstates a discontinued hedging
relationship, the entity shall read references in paragraphs 102Z1 and 102Z2

to the date the alternative benchmark rate is designated as a non-
contractually specified risk portion for the first time as referring to the date of

initial application of these amendments (ie the 24-month period for that
alternative benchmark rate designated as a non-contractually specified risk
portion begins from the date of initial application of these amendments).
An entity is not required to restate prior periods to reflect the application of
these amendments. The entity may restate prior periods if, and only if, it is
possible without the use of hindsight. If an entity does not restate prior
periods, the entity shall recognise any difference between the previous
carrying amount and the carrying amount at the beginning of the annual
reporting period that includes the date of initial application of these
amendments in the opening retained earnings (or other component of equity,
as appropriate) of the annual reporting period that includes the date of initial
application of these amendments.

Withdrawal of other pronouncements

This Standard supersedes IAS 39 Financial Instruments: Recognition and
Measurement revised in October 2000.
This Standard and the accompanying Implementation Guidance supersede the
Implementation Guidance issued by the IAS 39 Implementation Guidance
Committee, established by the former IASC.

Appendix A
Application guidance

This appendix is an integral part of the Standard.
[Deleted]

Hedging (paragraphs 71–102)

Hedging instruments (paragraphs 72–77)

Qualifying instruments (paragraphs 72 and 73)

The potential loss on an option that an entity writes could be significantly
greater than the potential gain in value of a related hedged item. In other
words, a written option is not effective in reducing the profit or loss exposure
of a hedged item. Therefore, a written option does not qualify as a hedging
instrument unless it is designated as an offset to a purchased option,
including one that is embedded in another financial instrument (for example,
a written call option used to hedge a callable liability). In contrast, a
purchased option has potential gains equal to or greater than losses and
therefore has the potential to reduce profit or loss exposure from changes in
fair values or cash flows. Accordingly, it can qualify as a hedging instrument.
A financial asset measured at amortised cost may be designated as a hedging
instrument in a hedge of foreign currency risk.
[Deleted]
An entity’s own equity instruments are not financial assets or financial
liabilities of the entity and therefore cannot be designated as hedging
instruments.

Hedged items (paragraphs 78–84)
Qualifying items (paragraphs 78–80)

A firm commitment to acquire a business in a business combination cannot be
a hedged item, except for foreign exchange risk, because the other risks being
hedged cannot be specifically identified and measured. These other risks are
general business risks.
An equity method investment cannot be a hedged item in a fair value hedge
because the equity method recognises in profit or loss the investor’s share of
the associate’s profit or loss, rather than changes in the investment’s fair
value. For a similar reason, an investment in a consolidated subsidiary cannot
be a hedged item in a fair value hedge because consolidation recognises in
profit or loss the subsidiary’s profit or loss, rather than changes in the
investment’s fair value. A hedge of a net investment in a foreign operation is
different because it is a hedge of the foreign currency exposure, not a fair
value hedge of the change in the value of the investment.

Paragraph 80 states that in consolidated financial statements the
foreign currency risk of a highly probable forecast intragroup transaction may
qualify as a hedged item in a cash flow hedge, provided the transaction is
denominated in a currency other than the functional currency of the entity
entering into that transaction and the foreign currency risk will affect
consolidated profit or loss. For this purpose an entity can be a parent,
subsidiary, associate, joint venture or branch. If the foreign currency risk of a
forecast intragroup transaction does not affect consolidated profit or loss, the
intragroup transaction cannot qualify as a hedged item. This is usually the
case for royalty payments, interest payments or management charges between
members of the same group unless there is a related external transaction.
However, when the foreign currency risk of a forecast intragroup transaction
will affect consolidated profit or loss, the intragroup transaction can qualify as
a hedged item. 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. Similarly, a forecast intragroup sale
of plant and equipment from the group entity that manufactured it to a group
entity that will use the plant and equipment in its operations may affect
consolidated profit or loss. This could occur, for example, because the plant
and equipment will be depreciated by the purchasing entity and the amount
initially recognised for the plant and equipment may change if the forecast
intragroup transaction is denominated in a currency other than the functional
currency of the purchasing entity.
If a hedge of a forecast intragroup transaction qualifies for hedge accounting,
any gain or loss that is recognised in other comprehensive income in
accordance with paragraph 95(a) shall be reclassified from equity to profit or
loss as a reclassification adjustment in the same period or periods during
which the foreign currency risk of the hedged transaction affects consolidated
profit or loss.
An entity can designate all changes in the cash flows or fair value of a hedged
item in a hedging relationship. An entity can also designate only changes in
the cash flows or fair value of a hedged item above or below a specified price
or other variable (a one-sided risk). The intrinsic value of a purchased option
hedging instrument (assuming that it has the same principal terms as the
designated risk), but not its time value, reflects a one-sided risk in a hedged
item. For example, an entity can designate the variability of future cash flow
outcomes resulting from a price increase of a forecast commodity purchase. In
such a situation, only cash flow losses that result from an increase in the price
above the specified level are designated. The hedged risk does not include the
time value of a purchased option because the time value is not a component of
the forecast transaction that affects profit or loss (paragraph 86(b)).

Designation of financial items as hedged items
(paragraphs 81 and 81A)

If a portion of the cash flows of a financial asset or financial liability is
designated as the hedged item, that designated portion must be less than the
total cash flows of the asset or liability. For example, in the case of a liability
whose effective interest rate is below LIBOR, an entity cannot designate (a) a portion of the liability equal to the principal amount plus interest at LIBOR
and (b) a negative residual portion. However, the entity may designate all of
the cash flows of the entire financial asset or financial liability as the hedged
item and hedge them for only one particular risk (eg only for changes that are
attributable to changes in LIBOR). For example, in the case of a financial
liability whose effective interest rate is 100 basis points below LIBOR, an entity
can designate as the hedged item the entire liability (ie principal plus interest
at LIBOR minus 100 basis points) and hedge the change in the fair value or
cash flows of that entire liability that is attributable to changes in LIBOR. The
entity may also choose a hedge ratio of other than one to one in order to
improve the effectiveness of the hedge as described in paragraph AG100.
In addition, if a fixed rate financial instrument is hedged some time after its
origination and interest rates have changed in the meantime, the entity can
designate a portion equal to a benchmark rate that is higher than the
contractual rate paid on the item. 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 it first
designates the hedged item. For example, assume an entity originates a fixed
rate financial asset of CU100 that has an effective interest rate of 6 per cent at
a time when LIBOR is 4 per cent. It begins to hedge that asset some time later
when LIBOR has increased to 8 per cent and the fair value of the asset has
decreased to CU90. The entity calculates that if it had purchased the asset on
the date it first designates it as the hedged item for its then fair value of CU90,
the effective yield would have been 9.5 per cent. Because LIBOR is less than
this effective yield, the entity can designate a LIBOR portion of 8 per cent that
consists partly of the contractual interest cash flows and partly of the
difference between the current fair value (ie CU90) and the amount repayable
on maturity (ie CU100).
Paragraph 81 permits an entity to designate something other than the
entire fair value change or cash flow variability of a financial instrument. For
example:
(a) all of the cash flows of a financial instrument may be designated for
cash flow or fair value changes attributable to some (but not all) risks;
or
(b) some (but not all) of the cash flows of a financial instrument may be
designated for cash flow or fair value changes attributable to all or
only some risks (ie a ‘portion’ of the cash flows of the financial
instrument may be designated for changes attributable to all or only
some risks).
To be eligible for hedge accounting, the designated risks and portions must be
separately identifiable components of the financial instrument, and changes
in the cash flows or fair value of the entire financial instrument arising from
changes in the designated risks and portions must be reliably measurable. For example:

(a) for a fixed rate financial instrument hedged for changes in fair value
attributable to changes in a risk-free or benchmark interest rate, the
risk-free or benchmark rate is normally regarded as both a separately
identifiable component of the financial instrument and reliably
measurable.
(b) inflation is not separately identifiable and reliably measurable and
cannot be designated as a risk or a portion of a financial instrument
unless the requirements in (c) are met.
(c) a contractually specified inflation portion of the cash flows of a
recognised inflation-linked bond (assuming there is no requirement to
account for an embedded derivative separately) is separately
identifiable and reliably measurable as long as other cash flows of the
instrument are not affected by the inflation portion.

Designation of non-financial items as hedged items (paragraph 82)

Changes in the price of an ingredient or component of a non-financial asset or
non-financial liability generally do not have a predictable, separately
measurable effect on the price of the item that is comparable to the effect of,
say, a change in market interest rates on the price of a bond. Thus, a
non-financial asset or non-financial liability is a hedged item only in its
entirety or for foreign exchange risk. If there is a difference between the
terms of the hedging instrument and the hedged item (such as for a hedge of
the forecast purchase of Brazilian coffee using a forward contract to purchase
Colombian coffee on otherwise similar terms), the hedging relationship
nonetheless can qualify as a hedge relationship provided all the conditions
in paragraph 88 are met, including that the hedge is expected to be highly
effective. For this purpose, the amount of the hedging instrument may be
greater or less than that of the hedged item if this improves the effectiveness
of the hedging relationship. For example, a regression analysis could be
performed to establish a statistical relationship between the hedged item (eg a
transaction in Brazilian coffee) and the hedging instrument (eg a transaction
in Colombian coffee). If there is a valid statistical relationship between the two
variables (ie between the unit prices of Brazilian coffee and Colombian coffee),
the slope of the regression line can be used to establish the hedge ratio that
will maximise expected effectiveness. For example, if the slope of the
regression line is 1.02, a hedge ratio based on 0.98 quantities of hedged items
to 1.00 quantities of the hedging instrument maximises expected
effectiveness. However, the hedging relationship may result in ineffectiveness
that is recognised in profit or loss during the term of the hedging relationship.

Designation of groups of items as hedged items
(paragraphs 83 and 84)

A hedge of an overall net position (eg the net of all fixed rate assets and fixed
rate liabilities with similar maturities), rather than of a specific hedged item,
does not qualify for hedge accounting. However, almost the same effect on
profit or loss of hedge accounting for this type of hedging relationship can be
achieved by designating as the hedged item part of the underlying items. For example, if a bank has CU100 of assets and CU90 of liabilities with risks and
terms of a similar nature and hedges the net CU10 exposure, it can designate
as the hedged item CU10 of those assets. This designation can be used if such
assets and liabilities are fixed rate instruments, in which case it is a fair value
hedge, or if they are variable rate instruments, in which case it is a cash flow
hedge. Similarly, if an entity has a firm commitment to make a purchase in a
foreign currency of CU100 and a firm commitment to make a sale in the
foreign currency of CU90, it can hedge the net amount of CU10 by acquiring a
derivative and designating it as a hedging instrument associated with CU10 of
the firm purchase commitment of CU100.

Hedge accounting (paragraphs 85–102)

An example of a fair value hedge is a hedge of exposure to changes in the fair
value of a fixed rate debt instrument as a result of changes in interest rates.
Such a hedge could be entered into by the issuer or by the holder.
An example of a cash flow hedge is the use of a swap to change floating rate
debt to fixed rate debt (ie a hedge of a future transaction where the future
cash flows being hedged are the future interest payments).
A hedge of a firm commitment (eg 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.
Accordingly, such a hedge is a fair value hedge. However, under paragraph 87
a hedge of the foreign currency risk of a firm commitment could alternatively
be accounted for as a cash flow hedge.

Assessing hedge effectiveness

A hedge is regarded as highly effective only if both of the following conditions
are met:
(a) At the inception of the hedge and in subsequent periods, the hedge is
expected to be highly effective in achieving offsetting changes in fair
value or cash flows attributable to the hedged risk during the period
for which the hedge is designated. Such an expectation can be
demonstrated in various ways, including a comparison of past changes
in the fair value or cash flows of the hedged item that are attributable
to the hedged risk with past changes in the fair value or cash flows of
the hedging instrument, or by demonstrating a high statistical
correlation between the fair value or cash flows of the hedged
item and those of the hedging instrument. The entity may choose a
hedge ratio of other than one to one in order to improve
the effectiveness of the hedge as described in paragraph AG100.
(b) The actual results of the hedge are within a range of 80–125 per cent.
For example, if actual results are such that the loss on the hedging
instrument is CU120 and the gain on the cash instrument is CU100,
offset can be measured by 120/100, which is 120 per cent, or by
100/120, which is 83 per cent. In this example, assuming the hedge meets the condition in (a), the entity would conclude that the hedge
has been highly effective.
Effectiveness is assessed, at a minimum, at the time an entity prepares its
annual or interim financial statements.
This Standard does not specify a single method for assessing hedge
effectiveness. The method an entity adopts for assessing hedge effectiveness
depends on its risk management strategy. For example, if the entity’s risk
management strategy is to adjust the amount of the hedging
instrument periodically to reflect changes in the hedged position, the entity
needs to demonstrate that the hedge is expected to be highly effective only for
the period until the amount of the hedging instrument is next adjusted. In
some cases, an entity adopts different methods for different types of hedges.
An entity’s documentation of its hedging strategy includes its procedures for
assessing effectiveness. Those procedures state whether the assessment
includes all of the gain or loss on a hedging instrument or whether the
instrument’s time value is excluded.
If an entity hedges less than 100 per cent of the exposure on an item, such as
85 per cent, it shall designate the hedged item as being 85 per cent of the
exposure and shall measure ineffectiveness based on the change in that
designated 85 per cent exposure. However, when hedging the designated
85 per cent exposure, the entity may use a hedge ratio of other than one to
one if that improves the expected effectiveness of the hedge, as explained
in paragraph AG100.
If the principal terms of the hedging instrument and of the hedged asset,
liability, firm commitment or highly probable forecast transaction are the
same, the changes in fair value and cash flows attributable to the risk being
hedged may be likely to offset each other fully, both when the hedge is
entered into and afterwards. For example, an interest rate swap is likely to be
an effective hedge if the notional and principal amounts, term, repricing
dates, dates of interest and principal receipts and payments, and basis for
measuring interest rates are the same for the hedging instrument and the
hedged item. In addition, a hedge of a highly probable forecast purchase of a
commodity with a forward contract is likely to be highly effective if:
(a) the forward contract is for the purchase of the same quantity of the
same commodity at the same time and location as the hedged forecast
purchase;
(b) the fair value of the forward contract at inception is zero; and
(c) either the change in the discount or premium on the forward contract
is excluded from the assessment of effectiveness and recognised in
profit or loss or the change in expected cash flows on the highly
probable forecast transaction is based on the forward price for the
commodity.

Sometimes the hedging instrument offsets only part of the hedged risk.
For example, a hedge would not be fully effective if the hedging instrument
and hedged item are denominated in different currencies that do not move in
tandem. Also, a hedge of interest rate risk using a derivative would not be
fully effective if part of the change in the fair value of the derivative is
attributable to the counterparty’s credit risk.
To qualify for hedge accounting, the hedge must relate to a specific identified
and designated risk, and not merely to the entity’s general business risks, and
must ultimately affect the entity’s profit or loss. A hedge of the risk of
obsolescence of a physical asset or the risk of expropriation of property by a
government is not eligible for hedge accounting; effectiveness cannot be
measured because those risks are not measurable reliably.
Paragraph 74(a) permits an entity to separate the intrinsic value and time
value of an option contract and designate as the hedging instrument only the
change in the intrinsic value of the option contract. Such a designation may
result in a hedging relationship that is perfectly effective in achieving
offsetting changes in cash flows attributable to a hedged one-sided risk of a
forecast transaction, if the principal terms of the forecast
transaction and hedging instrument are the same.
If an entity designates a purchased option in its entirety as the hedging
instrument of a one-sided risk arising from a forecast transaction, the hedging
relationship will not be perfectly effective. This is because the premium paid
for the option includes time value and, as stated in paragraph AG99BA, a
designated one-sided risk does not include the time value of an option.
Therefore, in this situation, there will be no offset between the cash flows
relating to the time value of the option premium paid and the designated
hedged risk.
In the case of interest rate risk, hedge effectiveness may be assessed by
preparing a maturity schedule for financial assets and financial liabilities that
shows the net interest rate exposure for each time period, provided that the
net exposure is associated with a specific asset or liability (or a specific group
of assets or liabilities or a specific portion of them) giving rise to the net
exposure, and hedge effectiveness is assessed against that asset or liability.
In assessing the effectiveness of a hedge, an entity generally considers the
time value of money. The fixed interest rate on a hedged item need not exactly
match the fixed interest rate on a swap designated as a fair value hedge. Nor
does the variable interest rate on an interest-bearing asset or liability need to
be the same as the variable interest rate on a swap designated as a cash flow
hedge. A swap’s fair value derives from its net settlements. The fixed and
variable rates on a swap can be changed without affecting the net settlement
if both are changed by the same amount.
If an entity does not meet hedge effectiveness criteria, the entity discontinues
hedge accounting from the last date on which compliance with hedge
effectiveness was demonstrated. However, if the entity identifies the event or
change in circumstances that caused the hedging relationship to fail the
effectiveness criteria, and demonstrates that the hedge was effective before the event or change in circumstances occurred, the entity discontinues hedge
accounting from the date of the event or change in circumstances.
For the avoidance of doubt, the effects of replacing the original counterparty
with a clearing counterparty and making the associated changes as described
in paragraphs 91(a)(ii) and 101(a)(ii) shall be reflected in the measurement of
the hedging instrument and therefore in the assessment of hedge
effectiveness and the measurement of hedge effectiveness.

Fair value hedge accounting for a portfolio hedge of interest rate
risk

For a fair value hedge of interest rate risk associated with a portfolio of
financial assets or financial liabilities, an entity would meet the requirements
of this Standard if it complies with the procedures set out in (a)–(i) and
paragraphs AG115–AG132 below.
(a) As part of its risk management process the entity identifies a portfolio
of items whose interest rate risk it wishes to hedge. The portfolio may
comprise only assets, only liabilities or both assets and liabilities. The
entity may identify two or more portfolios, in which case it applies the
guidance below to each portfolio separately.
(b) The entity analyses the portfolio into repricing time periods based on
expected, rather than contractual, repricing dates. The analysis into
repricing time periods may be performed in various ways including
scheduling cash flows into the periods in which they are expected to
occur, or scheduling notional principal amounts into all periods until
repricing is expected to occur.
(c) On the basis of this analysis, the entity decides the amount it wishes to
hedge. The entity designates as the hedged item an amount of assets or
liabilities (but not a net amount) from the identified portfolio equal to
the amount it wishes to designate as being hedged. This amount also
determines the percentage measure that is used for
testing effectiveness in accordance with paragraph AG126(b).
(d) The entity designates the interest rate risk it is hedging. This risk could
be a portion of the interest rate risk in each of the items in the hedged
position, such as a benchmark interest rate (eg LIBOR).
(e) The entity designates one or more hedging instruments for each
repricing time period.
(f) Using the designations made in (c)–(e) above, the entity assesses at
inception and in subsequent periods, whether the hedge is expected to
be highly effective during the period for which the hedge is
designated.
(g) Periodically, the entity measures the change in the fair value of the
hedged item (as designated in (c)) that is attributable to the hedged risk
(as designated in (d)), on the basis of the expected repricing dates
determined in (b). Provided that the hedge is determined actually to
have been highly effective when assessed using the entity’s

documented method of assessing effectiveness, the entity recognises
the change in fair value of the hedged item as a gain or loss in profit or
loss and in one of two line items in the statement of financial position
as described in paragraph 89A. The change in fair value need not be
allocated to individual assets or liabilities.
(h) The entity measures the change in fair value of the hedging
instrument(s) (as designated in (e)) and recognises it as a gain or loss in
profit or loss. The fair value of the hedging instrument(s) is recognised
as an asset or liability in the statement of financial position.
(i) Any ineffectiveness3

will be recognised in profit or loss as the
difference between the change in fair value referred to in (g) and that
referred to in (h).
This approach is described in more detail below. The approach shall be applied
only to a fair value hedge of the interest rate risk associated with a portfolio of
financial assets or financial liabilities.
The portfolio identified in paragraph AG114(a) could contain assets and
liabilities. Alternatively, it could be a portfolio containing only assets, or only
liabilities. The portfolio is used to determine the amount of the assets or
liabilities the entity wishes to hedge. However, the portfolio is not itself
designated as the hedged item.
In applying paragraph AG114(b), the entity determines the expected repricing
date of an item as the earlier of the dates when that item is expected to
mature or to reprice to market rates. The expected repricing dates are
estimated at the inception of the hedge and throughout the term of the hedge,
based on historical experience and other available information, including
information and expectations regarding prepayment rates, interest rates and
the interaction between them. Entities that have no entity-specific experience
or insufficient experience use peer group experience for comparable financial
instruments. These estimates are reviewed periodically and updated in the
light of experience. In the case of a fixed rate item that is prepayable, the
expected repricing date is the date on which the item is expected to prepay
unless it reprices to market rates on an earlier date. For a group of similar
items, the analysis into time periods based on expected repricing dates may
take the form of allocating a percentage of the group, rather than individual
items, to each time period. An entity may apply other methodologies for such
allocation purposes. For example, it may use a prepayment rate multiplier for
allocating amortising loans to time periods based on expected repricing dates.
However, the methodology for such an allocation shall be in accordance with
the entity’s risk management procedures and objectives.
As an example of the designation set out in paragraph AG114(c), if in a
particular repricing time period an entity estimates that it has fixed rate
assets of CU100 and fixed rate liabilities of CU80 and decides to hedge all of
the net position of CU20, it designates as the hedged item assets in the

amount of CU20 (a portion of the assets).4

The designation is expressed as an
‘amount of a currency’ (eg an amount of dollars, euro, pounds or rand) rather
than as individual assets. It follows that all of the assets (or liabilities) from
which the hedged amount is drawn—ie all of the CU100 of assets in the above
example—must be:
(a) items whose fair value changes in response to changes in the interest
rate being hedged; and
(b) items that could have qualified for fair value hedge accounting if they
had been designated as hedged individually. In particular, because
IFRS 13 specifies that the fair value of a financial liability with a
demand feature (such as demand deposits and some types of time
deposits) is not less than the amount payable on demand, discounted
from the first date that the amount could be required to be paid, such
an item cannot qualify for fair value hedge accounting for any time
period beyond the shortest period in which the holder can demand
payment. In the above example, the hedged position is an amount of
assets. Hence, such liabilities are not a part of the designated hedged
item, but are used by the entity to determine the amount of the asset
that is designated as being hedged. If the position the entity wished to
hedge was an amount of liabilities, the amount representing the
designated hedged item must be drawn from fixed rate liabilities other
than liabilities that the entity can be required to repay in an earlier
time period, and the percentage measure used for assessing hedge
effectiveness in accordance with paragraph AG126(b) would be
calculated as a percentage of these other liabilities. For example,
assume that an entity estimates that in a particular repricing time
period it has fixed rate liabilities of CU100, comprising CU40 of
demand deposits and CU60 of liabilities with no demand feature, and
CU70 of fixed rate assets. If the entity decides to hedge all of the net
position of CU30, it designates as the hedged item liabilities of CU30 or
50 per cent of the liabilities5

with no demand feature.

The entity also complies with the other designation and documentation
requirements set out in paragraph 88(a). For a portfolio hedge of interest rate
risk, this designation and documentation specifies the entity’s policy for all of
the variables that are used to identify the amount that is hedged and
how effectiveness is measured, including the following:
(a) which assets and liabilities are to be included in the portfolio hedge
and the basis to be used for removing them from the portfolio.
(b) how the entity estimates repricing dates, including what interest rate
assumptions underlie estimates of prepayment rates and the basis for
changing those estimates. The same method is used for both the initial
estimates made at the time an asset or liability is included in the
hedged portfolio and for any later revisions to those estimates.

(c) the number and duration of repricing time periods.
(d) how often the entity will test effectiveness and which of the two
methods in paragraph AG126 it will use.
(e) the methodology used by the entity to determine the amount of assets
or liabilities that are designated as the hedged item and, accordingly,
the percentage measure used when the entity tests effectiveness using
the method described in paragraph AG126(b).
(f) when the entity tests effectiveness using the method described
in paragraph AG126(b), whether the entity will test effectiveness for
each repricing time period individually, for all time periods in
aggregate, or by using some combination of the two.
The policies specified in designating and documenting the hedging
relationship shall be in accordance with the entity’s risk management
procedures and objectives. Changes in policies shall not be made arbitrarily.
They shall be justified on the basis of changes in market conditions and other
factors and be founded on and consistent with the entity’s risk management
procedures and objectives.
The hedging instrument referred to in paragraph AG114(e) may be a
single derivative or a portfolio of derivatives all of which contain exposure to
the hedged interest rate risk designated in paragraph AG114(d) (eg a portfolio
of interest rate swaps all of which contain exposure to LIBOR). Such a portfolio
of derivatives may contain offsetting risk positions. However, it may not
include written options or net written options, because the Standard6
does not
permit such options to be designated as hedging instruments (except when a
written option is designated as an offset to a purchased option). If the hedging
instrument hedges the amount designated in paragraph AG114(c) for more
than one repricing time period, it is allocated to all of the time periods that it
hedges. However, the whole of the hedging instrument must be allocated to
those repricing time periods because the Standard7

does not permit a hedging
relationship to be designated for only a portion of the time period during
which a hedging instrument remains outstanding.
When the entity measures the change in the fair value of a prepayable item in
accordance with paragraph AG114(g), a change in interest rates affects the fair
value of the prepayable item in two ways: it affects the fair value of the
contractual cash flows and the fair value of the prepayment option that is
contained in a prepayable item. Paragraph 81 of the Standard permits an
entity to designate a portion of a financial asset or financial liability, sharing a
common risk exposure, as the hedged item, provided effectiveness can be
measured. For prepayable items, paragraph 81A permits this to be achieved by
designating the hedged item in terms of the change in the fair value that is
attributable to changes in the designated interest rate on the basis of expected,
rather than contractual, repricing dates. However, the effect that changes in
the hedged interest rate have on those expected repricing dates shall be included when determining the change in the fair value of the hedged item.
Consequently, if the expected repricing dates are revised (eg to reflect a
change in expected prepayments), or if actual repricing dates differ from those
expected, ineffectiveness will arise as described in paragraph AG126.
Conversely, changes in expected repricing dates that (a) clearly arise from
factors other than changes in the hedged interest rate, (b) are uncorrelated
with changes in the hedged interest rate and (c) can be reliably separated from
changes that are attributable to the hedged interest rate (eg changes in
prepayment rates clearly arising from a change in demographic factors or tax
regulations rather than changes in interest rate) are excluded when
determining the change in the fair value of the hedged item, because they are
not attributable to the hedged risk. If there is uncertainty about the factor
that gave rise to the change in expected repricing dates or the entity is not
able to separate reliably the changes that arise from the hedged interest rate
from those that arise from other factors, the change is assumed to arise from
changes in the hedged interest rate.
The Standard does not specify the techniques used to determine the amount
referred to in paragraph AG114(g), namely the change in the fair value of
the hedged item that is attributable to the hedged risk. If statistical or other
estimation techniques are used for such measurement, management must
expect the result to approximate closely that which would have been obtained
from measurement of all the individual assets or liabilities that constitute the
hedged item. It is not appropriate to assume that changes in the fair value of
the hedged item equal changes in the value of the hedging instrument.
Paragraph 89A requires that if the hedged item for a particular repricing time
period is an asset, the change in its value is presented in a separate line item
within assets. Conversely, if the hedged item for a particular repricing time
period is a liability, the change in its value is presented in a separate line item
within liabilities. These are the separate line items referred to in
paragraph AG114(g). Specific allocation to individual assets (or liabilities) is
not required.
Paragraph AG114(i) notes that ineffectiveness arises to the extent that the
change in the fair value of the hedged item that is attributable to the hedged
risk differs from the change in the fair value of the hedging derivative. Such a
difference may arise for a number of reasons, including:
(a) actual repricing dates being different from those expected, or expected
repricing dates being revised;
(b) items in the hedged portfolio becoming impaired or being
derecognised;
(c) the payment dates of the hedging instrument and the hedged item
being different; and
(d) other causes (eg when a few of the hedged items bear interest at a rate
below the benchmark rate for which they are designated as being
hedged, and the resulting ineffectiveness is not so great that the
portfolio as a whole fails to qualify for hedge accounting).

Such ineffectiveness8

shall be identified and recognised in profit or loss.
Generally, the effectiveness of the hedge will be improved:
(a) if the entity schedules items with different prepayment characteristics
in a way that takes account of the differences in prepayment
behaviour.
(b) when the number of items in the portfolio is larger. When only a few
items are contained in the portfolio, relatively high ineffectiveness is
likely if one of the items prepays earlier or later than expected.
Conversely, when the portfolio contains many items, the prepayment
behaviour can be predicted more accurately.
(c) when the repricing time periods used are narrower (eg 1-month as
opposed to 3-month repricing time periods). Narrower repricing time
periods reduce the effect of any mismatch between the repricing and
payment dates (within the repricing time period) of the hedged
item and those of the hedging instrument.
(d) the greater the frequency with which the amount of the hedging
instrument is adjusted to reflect changes in the hedged item (eg
because of changes in prepayment expectations).
An entity tests effectiveness periodically. If estimates of repricing dates
change between one date on which an entity assesses effectiveness and the
next, it shall calculate the amount of effectiveness either:
(a) as the difference between the change in the fair value of the hedging
instrument (see paragraph AG114(h)) and the change in the value of
the entire hedged item that is attributable to changes in the hedged
interest rate (including the effect that changes in the hedged interest
rate have on the fair value of any embedded prepayment option); or
(b) using the following approximation. The entity:
(i) calculates the percentage of the assets (or liabilities) in each
repricing time period that was hedged, on the basis of the
estimated repricing dates at the last date it tested effectiveness.
(ii) applies this percentage to its revised estimate of the amount in
that repricing time period to calculate the amount of the
hedged item based on its revised estimate.
(iii) calculates the change in the fair value of its revised estimate of
the hedged item that is attributable to the hedged risk and
presents it as set out in paragraph AG114(g).
(iv) recognises ineffectiveness equal to the difference between the
amount determined in (iii) and the change in the fair value of
the hedging instrument (see paragraph AG114(h)).

When measuring effectiveness, the entity distinguishes revisions to the
estimated repricing dates of existing assets (or liabilities) from the origination
of new assets (or liabilities), with only the former giving rise to ineffectiveness.
All revisions to estimated repricing dates (other than those excluded in
accordance with paragraph AG121), including any reallocation of existing
items between time periods, are included when revising the estimated amount
in a time period in accordance with paragraph AG126(b)(ii) and hence when
measuring effectiveness. Once ineffectiveness has been recognised as set out
above, the entity establishes a new estimate of the total assets (or liabilities) in
each repricing time period, including new assets (or liabilities) that have been
originated since it last tested effectiveness, and designates a new amount as
the hedged item and a new percentage as the hedged percentage. The
procedures set out in paragraph AG126(b) are then repeated at the next date it
tests effectiveness.
Items that were originally scheduled into a repricing time period may be
derecognised because of earlier than expected prepayment or write-offs caused
by impairment or sale. When this occurs, the amount of change in fair value
included in the separate line item referred to in paragraph AG114(g) that
relates to the derecognised item shall be removed from the statement of
financial position, and included in the gain or loss that arises on derecognition
of the item. For this purpose, it is necessary to know the repricing time
period(s) into which the derecognised item was scheduled, because this
determines the repricing time period(s) from which to remove it and hence
the amount to remove from the separate line item referred to in
paragraph AG114(g). When an item is derecognised, if it can be determined in
which time period it was included, it is removed from that time period. If not,
it is removed from the earliest time period if the derecognition resulted from
higher than expected prepayments, or allocated to all time periods containing
the derecognised item on a systematic and rational basis if the item was sold
or became impaired.
In addition, any amount relating to a particular time period that has not
been derecognised when the time period expires is recognised in profit or loss
at that time (see paragraph 89A). For example, assume an entity schedules
items into three repricing time periods. At the previous redesignation, the
change in fair value reported in the single line item in the statement of
financial position was an asset of CU25. That amount represents amounts
attributable to periods 1, 2 and 3 of CU7, CU8 and CU10, respectively. At the
next redesignation, the assets attributable to period 1 have been either
realized or rescheduled into other periods. Therefore, CU7 is derecognized
from the statement of financial position and recognized in profit or loss.
CU8 and CU10 are now attributable to periods 1 and 2, respectively. These
remaining periods are then adjusted, as necessary, for changes in fair value as
described in paragraph AG114(g).
As an illustration of the requirements of the previous two paragraphs, assume
that an entity scheduled assets by allocating a percentage of the portfolio into
each repricing time period. Assume also that it scheduled CU100 into each of
the first two time periods. When the first repricing time period expires, CU110 of assets are derecognised because of expected and unexpected
repayments. In this case, all of the amount contained in the separate line item
referred to in paragraph AG114(g) that relates to the first time period is
removed from the statement of financial position, plus 10 per cent of the
amount that relates to the second time period.
If the hedged amount for a repricing time period is reduced without the
related assets (or liabilities) being derecognized, the amount included in the
separate line item referred to in paragraph AG114(g) that relates to the
reduction shall be amortized in accordance with paragraph 92.
An entity may wish to apply the approach set out in paragraphs
AG114–AG131 to a portfolio hedge that had previously been accounted for as a
cash flow hedge in accordance with IAS 39. Such an entity would revoke the
previous designation of a cash flow hedge in accordance with
paragraph 101(d), and apply the requirements set out in that paragraph. It
would also redesignate the hedge as a fair value hedge and apply the approach
set out in paragraphs AG114–AG131 prospectively to subsequent accounting
periods.

Transition (paragraphs 103–108C)

An entity may have designated a forecast intragroup transaction as a hedged
item at the start of an annual period beginning on or after 1 January 2005 (or,
for the purpose of restating comparative information, the start of an earlier
comparative period) in a hedge that would qualify for hedge accounting in
accordance with this Standard (as amended by the last sentence of
paragraph 80). Such an entity may use that designation to apply hedge
accounting in consolidated financial statements from the start of the annual
period beginning on or after 1 January 2005 (or the start of the earlier
comparative period). Such an entity shall also apply paragraphs AG99A and
AG99B from the start of the annual period beginning on or after 1 January
2005. However, in accordance with paragraph 108B, it need not apply
paragraph AG99B to comparative information for earlier periods.

Appendix B
Amendments to other pronouncements

The amendments in this appendix shall be applied for annual periods beginning on or after 1 January
2005. If an entity applies this Standard for an earlier period, these amendments shall be applied for
that earlier period.

* * * * *

The amendments contained in this appendix when this Standard was revised in 2003 have been
incorporated into the relevant pronouncements.

Approval by the Board of Fair Value Hedge Accounting for a
Portfolio Hedge of Interest Rate Risk (Amendments to IAS 39)
issued in March 2004

Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk (Amendments to IAS 39)
was approved for issue by thirteen of the fourteen members of the International
Accounting Standards Board. Mr Smith dissented. His dissenting opinion is set out after
the Basis for Conclusions.
Sir David Tweedie Chairman
Thomas E Jones Vice-Chairman
Mary E Barth
Hans-Georg Bruns
Anthony T Cope
Robert P Garnett
Gilbert Gélard
James J Leisenring
Warren J McGregor
Patricia L O’Malley
Harry K Schmid
John T Smith
Geoffrey Whittington
Tatsumi Yamada

Approval by the Board of Transition and Initial Recognition of
Financial Assets and Financial Liabilities (Amendments to IAS 39)
issued in December 2004

Transition and Initial Recognition of Financial Assets and Financial Liabilities (Amendments to
IAS 39) was approved for issue by the fourteen members of the International Accounting
Standards Board.
Sir David Tweedie Chairman
Thomas E Jones Vice-Chairman
Mary E Barth
Hans-Georg Bruns
Anthony T Cope
Jan Engström
Robert P Garnett
Gilbert Gélard
James J Leisenring
Warren J McGregor
Patricia L O’Malley
John T Smith
Geoffrey Whittington
Tatsumi Yamada

Approval by the Board of Cash Flow Hedge Accounting of
Forecast Intragroup Transactions (Amendments to IAS 39) issued
in April 2005

Cash Flow Hedge Accounting of Forecast Intragroup Transactions (Amendments to IAS 39) was
approved for issue by the fourteen members of the International Accounting Standards
Board.
Sir David Tweedie Chairman
Thomas E Jones Vice-Chairman
Mary E Barth
Hans-Georg Bruns
Anthony T Cope
Jan Engström
Robert P Garnett
Gilbert Gélard
James J Leisenring
Warren J McGregor
Patricia L O’Malley
John T Smith
Geoffrey Whittington
Tatsumi Yamada

Approval by the Board of Financial Guarantee Contracts
(Amendments to IAS 39 and IFRS 4) issued in August 2005

Financial Guarantee Contracts (Amendments to IAS 39 and IFRS 4 Insurance Contracts) was
approved for issue by the fourteen members of the International Accounting Standards
Board.
Sir David Tweedie Chairman
Thomas E Jones Vice-Chairman
Mary E Barth
Hans-Georg Bruns
Anthony T Cope
Jan Engström
Robert P Garnett
Gilbert Gélard
James J Leisenring
Warren J McGregor
Patricia L O’Malley
John T Smith
Geoffrey Whittington
Tatsumi Yamada

Approval by the Board of Eligible Hedged Items (Amendment to
IAS 39) issued in July 2008

Eligible Hedged Items (Amendment to IAS 39) was approved for issue by the thirteen
members of the International Accounting Standards Board.
Sir David Tweedie Chairman
Thomas E Jones Vice-Chairman
Mary E Barth
Stephen Cooper
Philippe Danjou
Jan Engström
Robert P Garnett
Gilbert Gélard
James J Leisenring
Warren J McGregor
John T Smith
Tatsumi Yamada
Wei-Guo Zhang

Approval by the Board of Embedded Derivatives (Amendments to
IFRIC 9 and IAS 39) issued in March 2009

Embedded Derivatives (Amendments to IFRIC 9 and IAS 39) was approved for issue by the
fourteen members of the International Accounting Standards Board.
Sir David Tweedie Chairman
Thomas E Jones Vice-Chairman
Mary E Barth
Stephen Cooper
Philippe Danjou
Jan Engström
Robert P Garnett
Gilbert Gélard
Prabhakar Kalavacherla
James J Leisenring
Warren J McGregor
John T Smith
Tatsumi Yamada
Wei-Guo Zhang

Approval by the Board of Novation of Derivatives and
Continuation of Hedge Accounting (Amendments to IAS 39)
issued in June 2013

Novation of Derivatives and Continuation of Hedge Accounting was approved for issue by the
sixteen members of the International Accounting Standards Board.
Hans Hoogervorst Chairman
Ian Mackintosh Vice-Chairman
Stephen Cooper
Philippe Danjou
Martin Edelmann
Jan Engström
Patrick Finnegan
Amaro Luiz de Oliveira Gomes
Gary Kabureck
Prabhakar Kalavacherla
Patricia McConnell
Takatsugu Ochi
Darrel Scott
Chungwoo Suh
Mary Tokar
Wei-Guo Zhang

Approval by the Board of IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9, IFRS 7 and IAS 39)
issued in November 2013

IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and
IAS 39) was approved for issue by fifteen of the sixteen members of the International
Accounting Standards Board. Mr Finnegan dissented. His dissenting opinion is set out
after the Basis for Conclusions.
Hans Hoogervorst Chairman
Ian Mackintosh Vice-Chairman
Stephen Cooper
Philippe Danjou
Martin Edelmann
Jan Engström
Patrick Finnegan
Amaro Luiz de Oliveira Gomes
Gary Kabureck
Prabhakar Kalavacherla
Patricia McConnell
Takatsugu Ochi
Darrel Scott
Chungwoo Suh
Mary Tokar
Wei-Guo Zhang

Approval by the Board of Interest Rate Benchmark Reform issued
in September 2019

Interest Rate Benchmark Reform, which amended IFRS 9, IAS 39 and IFRS 7, was approved for
issue by all 14 members of the International Accounting Standards Board (Board).
Hans Hoogervorst Chairman
Suzanne Lloyd Vice-Chair
Nick Anderson
Tadeu Cendon
Martin Edelmann
Françoise Flores
Gary Kabureck
Jianqiao Lu
Darrel Scott
Thomas Scott
Chungwoo Suh
Rika Suzuki
Ann Tarca
Mary Tokar

Approval by the Board of Interest Rate Benchmark Reform—
Phase 2 issued in August 2020

Interest Rate Benchmark Reform—Phase 2, which amended IFRS 9, IAS 39, IFRS 7, IFRS 4 and
IFRS 16, was approved for issue by 12 of 13 members of the International Accounting
Standards Board (Board). Mr Gast abstained in view of his recent appointment to the
Board.
Hans Hoogervorst Chairman
Suzanne Lloyd Vice-Chair
Nick Anderson
Tadeu Cendon
Martin Edelmann
Françoise Flores
Zach Gast
Jianqiao Lu
Darrel Scott
Thomas Scott
Rika Suzuki
Ann Tarca
Mary Tokar