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How are hedged items designated in the IFRS 9?
Hedged items are identified and designated at inception of hedge. Recognized asset or liability, unrecognized firm commitment, forecasted transaction (highly probable), exposures (aggregated), net investment (foreign operations) etc., are some of the hedged items (provided they are reliably measurable).
- Exposure (aggregated) − Combination of derivative and exposure.
- Risk components − Financial and non-financial items are separately identifiable and reliably measured.
- Nominal amount − A proportion of the entire item and a layer component.
International Financial Accounting Standards 9 (IFRS 9)
Initially, IFRS 9 is the part of joint convergence imitative of IASB and FASB. Later they stopped working except for some part as they were unable to reach agreement on certain matters and some other reasons.
IFRS developed in different phases dealing with classifications & measurements, impairment and hedging separately. Instruments like recognition and measurement in International Accounting Standards 39 (IAS 39) are replaced in IFRS 9. First version of IFRS was issued in 2014 and from 1st Jan 2018 it was made mandatory.
Major changes in IFRS 9
The changes in the IFRS 9 are as follows −
- Classification & measurement − IFRS 9 replaces patchworks (accommodation options, arbitrary bright line tests and prevention measures) in IASs 39. It added volatility in profit and loss threat and treatment of derivatives (in financial assets).
- Impairment − Changes in investments (equity instruments), Loans & Receivables (short term trade receivables included).
- Credit losses − On discounted basis.
- Hedging − Allowed more exposures to hedged and new criteria is established.
- Disclosures.
- Transition.
According to International financial reporting standards 9 (IFRS 9), hedged items are designated as follows −
- Proposed changes to remove restrictions which are preventing economically rational hedging strategies for qualifying for hedge accounting.
- An asset/liability/unrecognised firm commitment/a forecast transaction/net investment in foreign operations are recognised as hedged items.
- All components of both financial items and non-financial items are possible to hedge risk.
- As hedged items, net positions including net nil positions (in some circumstances) are allowed.
- Layers are allowed for both fair value hedges and cash flow hedges (in some circumstances) and for pre-payable items some restrictions are there.
- As hedged items, allows aggregated exposures.
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