IAS 39
Financial Instruments: Recognition and Measurement
Issued in March 1999
Revised in December 2003
Recent amendment: by IFRS 3 revised in January 2008
Financial Instruments
Hedge Accounting
When can a derivative be designated as a hedging instrument?
--> only if a derivative meets the conditions of IAS 39, Para. 88
Can a purchased option qualify as a hedging instrument?
--> Yes.
Can a written option qualify as a hedging instrument?
--> In general, no.
When can a written option qualify as a hedging instrument?
--> only when a written option is designated as an offset to a purchased option
Can a non-derivative financial asset qualify as a hedging instrument?
--> only for a hedge of a foreign currency risk
Can a non-derivative financial liability qualify as a hedging instrument?
--> only for a hedge of a foreign currency risk
Three types of hedging relationships:
(1) fair value hedge
(2) cash flow hedge
(3) hedge of a net investment in a foreign operation
A hedge of foreign currency risk is treated
--> as a fair value hedge or a cash flow hedge
Conditions of IAS 39, Para. 88:
(1) formal designation and documentation of hedging relationship
--> at the inception of hedge
(2) hedge is expected to be highly effective
(3) effectiveness of hedge can be reliably measured
(4) hedge is assessed and determined to have been highly effective
(5) for cash flow hedges, a forecast transaction
--> is highly probable and
--> presents an exposure to variations in cash flows
Fair value hedges
(1) for a derivative hedging instrument,
--> gain or loss
--> from remeasuring a derivative hedging instrument at fair value
--> is recognised in profit or loss
(2) for a non-derivative hedging instrument,
--> foreign currency component of its carrying amount
--> measured using the rules of IAS 21
--> is recognised in profit or loss
(3) gain or loss on the hedged item
(attributable to the hedged risk)
--> is recognised in profit or loss
--> by adjusting carrying amount
(of hedged item)
Cash flow hedges
Gain or loss on hedging instrument:
(1) effective portion
--> recognised in
other comprehensive income
(2) ineffective portion
--> recognised in
profit or loss
Hedges of a net investment in a foreign operation
Gain or loss on hedging instrument:
(1) effective portion
--> recognised in
other comprehensive income
(2) ineffective portion
--> recognised in
profit or loss
When the foreign operation is disposed of:
--> gain or loss recognised in other comprehensive income
--> is reclassified to profit or loss
--> as a reclassification adjustment
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