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The interpretations Committee tentatively decides not to take this topic into its agenda

 11 November 2015


The Interpretations Committee received a request to clarify how hedge effectiveness should be determined when accounting for net investment hedges in accordance with IFRS 9 Financial Instruments. Specifically, the submitter asked whether the ‘lower of’ test that is required for cash flow hedges should also be applied for determining the effective portion of the gains or losses arising from the hedging instrument when accounting for net investment hedges.

The Interpretations Committee observed that:

  1. paragraph 6.5.13 of IFRS 9 states that ‘Hedges of a net investment in a foreign operation … shall be accounted for similarly to cash flow hedges …’. Paragraph 6.5.13 (a), which focusses on net investment hedges, also has a reference to paragraph 6.5.11, which deals with the accounting for cash flow hedges; this includes the ‘lower of’ test. This indicates that the ‘lower of’ test should be applied when determining the effective portion of the gains or losses arising from the hedging instruments when accounting for net investment hedges.
  2. the application of the ‘lower of’ test for determining the effective portion of the gains or losses arising from the hedging instruments when accounting for net investment hedges avoids the recycling of exchange differences arising from the hedged items that have been recognised in other comprehensive income prior to the foreign operation being disposed of. The Interpretations Committee noted that such an outcome would be aligned to the requirements and principles of IAS 21 The Effects of Changes in Foreign Exchange Rates.

In addition, the Interpretations Committee noted the following:

  1. it received no evidence of significant diversity by entities using IAS 39 Financial Instruments: Recognition and Measurement when determining the effective portion of the gains or losses arising from the hedging instruments by applying the ‘lower of’ test when accounting for net investment hedges.
  2. few entities have yet adopted the hedging requirements in IFRS 9; consequently, it is too early to assess whether the issue is widespread. However, the Interpretations Committee did not expect significant diversity to arise when IFRS 9 is adopted more widely.

In the light of the existing IFRS requirements the Interpretations Committee determined that neither an Interpretation nor an amendment to a Standard was necessary and therefore [decided] not to add this issue to its agenda.


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