What are the qualifying criteria for hedge accounting in IFRS 9?

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Designating one or more hedging instruments so that it offset the change in fair value or change in cash flows of hedged items is called hedge accounting. Rules in IAS 39 are complex and strict.

Thus, many companies could apply hedge accounting and prepare two financial statements (one with meeting IAS 39 standards and other is non-audited pro forma). Due to complexity in IAS 39, a new set of hedging rules were issued in IFRS 9 on November 19, 2013.

Common points in IAS 39 and IFRS 9

The common points in the Indian accounting standards (IAS 39) and the International financial reporting standards (IFRS 9) are as follows −

  • Hedge accounting is optional.
  • Same terminology.
  • To qualify for hedge accounting, hedge documentation is required.
  • Same categories (fair value hedge, cash flow hedge, investment hedge).
  • Hedge ineffectiveness.
  • Can’t use written options as hedging instruments.


The differences between IAS 39 and IFRS 9 are as follows −

  • Hedging instruments.
  • Hedged items.
  • Testing effectiveness.
  • Rebalance.
  • Discontinuation.

Advantages of IFRS 9

  • Profit & Loss volatility is reduced (able to designate component of non-financial item in a hedge)
  • Risk management toolbox is enhanced (costs of hedging is treated as a separate component of equity. Cost of hedging includes time value of options, currency basis and forward points)
  • Competitive advantage (reviews process and hedge accounting policies closely) Qualification criteria

The qualifying criteria for hedge accounting under International financial reporting standards 9 (IFRS-9) is as follows−

Accepted classification and reporting of

  • Objectives and strategies of risk management.
  • Hedging instruments and hedged items.
  • Nature of risk.
  • Hedge effectiveness (source of ineffectiveness and determination of hedge ratio).

Some Hedging instruments and hedged items, which are not eligible under Indian accounting standards 39 (IAS 39) are eligible in International financial reporting standards 9 (IFRS 9).

Requirements for effectiveness of hedge are as follows −

  • Existence of an economical relationship.
  • No domination of credit risk to value changes.
  • Designated hedge ratio is reliable with risk management strategy.

Hedge accounting can be discontinued under specific circumstances.

Updated on 05-Jul-2021 13:46:28