CFM16345a - Accounting for financial instruments: IAS 32 and IAS 39: transition rules and hedging

Transition to IFRS - hedging

If, before the date of transition to IFRS, an entity had designated a transaction as a hedge but the hedge does not meet the conditions for hedge accounting in IAS 39, the entity must apply the rules on discontinuation of hedge accounting. Transactions entered into before the date of transition to IFRSs may not be retrospectively designated as hedges. The designation and documentation of a hedge relationship must be completed on or before the date of transition to IFRSs if the hedge relationship is to qualify for hedge accounting from that date.

Fair value hedges

If under previous GAAP the hedged item was not adjusted, the entity should adjust the carrying amount of the hedged item on transition with the adjustment amounting to the lower of:

• that portion of the cumulative change in the fair value of the hedged item that reflected the designated hedged risk and that was not recognised under previous GAAP; and
• that portion of the cumulative change in the fair value of the hedging instrument that reflects the designated hedged risk.

Cash flow hedges

Under its previous GAAP, an entity may have deferred gains and losses on a cash flow hedge of a forecast transaction. If, at the date of transition to IFRSs, the hedged forecast transaction is not highly probable, but is expected to occur, the entire deferred gain or losses is recognised in equity. Any net cumulative gain or loss that is reclassified to equity on initial application of IAS 39 remains in equity until (a) the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, (b) the forecast transaction affects profit or loss, or (c) circumstances subsequently change and the forecast transaction is no longer expected to occur, in which case any related net cumulative gain or loss that had been recognised directly in equity is recognised in profit or loss. If the hedging instrument is still held, but the hedge does not qualify as a cash flow hedge under IAS 39, hedge accounting is no longer appropriate starting from the date of transition to IFRSs. An entity may 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 IAS 39 is first applied.