IAS 39 Financial Instruments - Recognition and Measurement - Hedging of Future Cash Flows by an Option
Current status:
In September 2007, the IFRIC removed this issue from its agenda.
Summary of the issue:
The IFRIC has been asked whether it is possible to designate the full change in fair value (both time value and intrinsic value) of a purchased option as the hedging instrument in a fully effective cash flow hedging relationship.
It is argued that a fully effective hedging relationship can be achieved if the entity designates the hedge in the following way:
- the hedging instrument is designated as the entire fair value of a purchased option (including time value); and
- the hedged item is designated as being that portion of the forecast cash flows equivalent to a theoretical sold option embedded in the hedged item.
Whether a hedge relationship can be designated in this way depends upon whether it is possible to designate as a hedged item a portion of the forecast cash flows that is equivalent to a theoretical sold option embedded in the hedged item.
Latest progress on the issue:
The IFRIC has received a number of submissions asking whether the risks associated with a specific portion of an exposure might qualify for hedge accounting. Consequently, the IFRIC explored this issue together with two other related questions (Whether Inflation Risks Qualify as Separable Components for Hedging Purposes and Hedging Forecast Transactions with Derivatives of Shorter Maturity).
At its meeting in July 2006, the IFRIC asked the staff to refer these issues to the Board. At its October meeting, the Board decided to amend IAS 39 to provide additional guidance on what can be designated as a hedged portion of a financial instrument under IAS 39.
Discussed by the IFRIC :
Discussed by the Board:
Staff contact:
Rachel Knubley rknubley@iasb.org