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IFRS 9 Hedge Accounting

Hedge accounting was created as an option in order to reconcile accounting mismatches in financial instruments and thus also to give a true and fair view of the economic situation in financial statements based on the accounting. The economic protection of a risk through a hedge is also documented in the accounting, and the reporting of the underlying transaction (for a fair value hedge) is adjusted. However, the exercise of this option entails a number of additional requirements regarding documentation and reporting, with every company having to meet these requirements.

Effectiveness Testing – Challenges in Hedge Accounting

Effectiveness testing and the separation and disclosure of individual metrics are substantial challenges. The special option granted by the IASB in IFRS 9 to retain the rules of IAS 39 until the publication of a new macro hedge accounting method gives rise in part to new questions regarding how the old IAS 39 method can be brought into harmony with the new accounting and disclosure duties under IFRS 9. The conversion to a hedge accounting method under IFRS 9 is challenging due to the large number of open questions and unclarified definitions.

The Hedge Strategy

In order to achieve the desired effects over the long term, the first indispensable step is to define the specific objectives of the hedge accounting in a hedge strategy. The next step is to check how the content of this strategy can be implemented and what tools should be used. Furthermore, it is necessary to determine, on the basis of the defined objective, how achievement of the objective should be measured. To do this, a conversion between the economic and the reported result is usually integrated into the hedge process to determine systematic differences. This conversion offers the basis for ongoing analysis and optimization.

FAS AG as a Partner for your Hedge Accounting Issues

FAS AG has many years of experience with all issues related to hedge accounting and will support your clients with the development of a strategy, selection of software tools, implementation of micro and portfolio hedge accounting, preparation of the necessary disclosures in the Notes to the financial statements and, if need be, individual calculation of hedge effectiveness and results. Besides banks' common reporting of hedges as fair flow hedges, FAS AG has experience with the reporting of hedge strategies in cash flow accounting. FAS AG also has extensive expertise in the area of multi-curve measurement as part of hedge accounting, the harmonization of economic management and reporting on the balance sheet, as well as in the development of accounting entries. Besides reporting in accordance with IAS 39 and IFRS 9, FAS AG also provides advice on the implementation of valuation units in accordance with the German Commercial Code [Handelsgesetzbuch, HGB] (German Accounting Law Modernization Act [Bilanzrechtsmodernisierungsgesetz, BilMoG]) and application of "BFA 3 – Loss-free Valuation in the Banking Book" – and harmonization between German Commercial Code (HGB) reporting and International Financial Reporting Standards (IFRS) reporting.

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 Andreas Huthmann Managing Partner