Hedge Accounting for FX Forward IFRS - Overview

The hedge management and hedge accounting process helps you to mitigate profit and loss volatility from the use of derivatives.
Currently, the scope item supports IFRS 9 and covers cash flow hedge using FX forwards (including NDF) as hedging instruments.
The functionality helps you to automate labor-intensive processes, such as calculating net open exposure amount, creating hedging relationship for hedge item and hedge instrument, determining the key figures calculation (NPV, Forward, CCBS, CVA/DVA), performing the valuation of FX transaction, checking classification, dealing with the de-designation and generating posting journal reports.
Hedge Accounting for FX Forward IFRS - Process

The scope items provide an overview of net open exposure amount and supports the management of hedge accounting.
Users are able to reduce manual operation, such as hedge relationship mapping, designation and classification. Furthermore they make better operational and strategic decisions using the comprehensive reporting and analysis tools.
Hedge Accounting

In November 2013, IFRS 9 hedge accounting and amendments were published to replace the existing hedge accounting model in IAS 39.
The main elements of the new IFRS 9 hedge accounting cover simplified effectiveness testing, including removal of the 80 – 125 percent highly effective threshold. Also, less profit or loss volatility when using options, forwards and foreign currency swaps is used.
All in all, more items qualify for hedge accounting, for example, pricing components within a non-financial item or net foreign exchange cash positions. Finally, you can more effectively assign hedge account exposures to two risk positions by separate derivatives over different periods.

There are also several topics that have not changed in IFRS 9 compared to IAS 39. For example, the cash flow, fair value, and net investment models are retained. Measuring hedge effectiveness is still required. Also known from IAS 39, the hedge ineffectiveness is still to be reported in profit or loss. Companies are still bound to hedge documentation.

Under the new requirements, in order to qualify for hedge accounting, only prospective hedge effectiveness testing is required.
For simple hedge relationships, entities are expected to be able to apply a qualitative test (for example, critical terms match where the risk, quantity, and timing of the hedged item matches the hedging instrument).
For more complex hedging relationships, a more detailed quantitative test is likely to be required. The new requirements in IFRS 9 may lead to entities having to exercise additional judgment in practice for complex hedges.