IASB amends IAS39 on eligible hedged items
31 July 2008
The amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’ provides clarification on two issues how the existing principles underlying hedge accounting should be applied.
The amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’ provides clarification on two issues how the existing principles underlying hedge accounting should be applied.
- Inflation can only be designated as a hedged risk or portion if it is a contractually-specified portion of the cash flows (for example, in an inflation-linked bond where the inflation feature is not a separable embedded derivative).
- The time value of a purchased option used as a hedging instrument is not a risk or portion present in a hedged item and would cause ineffectiveness if the entire option is designated (an entity can improve effectiveness by excluding the time value of the hedging instrument as permitted by IAS 39).
The amendment also clarifies that a risk-free or benchmark interest rate portion of the fair value of a fixed rate financial instrument will normally be separately identifiable and reliably measurable, and hence may be hedged.
The amendment is to be applied retrospectively for annual periods beginning on or after 1 July 2009 with earlier adoption permitted if disclosed
Press release
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