CFM16270 - Accounting for financial instruments: IAS 32 and IAS 39: hedging instruments

Qualifying hedging instruments

All derivative contracts with an external counterparty may be designated as hedging instruments except for some written options. (A written option exposes the grantor to unlimited downside risk, so it will not normally be effective in reducing the profit or loss exposure of a hedged item).

"External counterparty" means a party external to the entity preparing accounts – so, for a group preparing consolidated accounts, it means a party outside of the group. CFM16270a provides further detail about hedging risks within a group.

A non-derivative financial asset or non-derivative financial liability may be designated as a hedging instrument only for a hedge of a foreign currency risk, so a held-to-maturity (HTM) investment carried at amortised cost may be designated as a hedging instrument in a hedge of foreign currency risk.

An entity’’s own equity instruments are not financial assets or financial liabilities of the entity and therefore cannot be designated as hedging instruments.

Further rules about what may be designated as a hedging instrument are covered in CFM16270b.