Almost three years after the exposure draft, the IASB published the third phase of the IFRS 9 project on hedge accounting. Gabriela Martinez from PwC's Accounting Consulting Services examines the new guidance.

The IASB published the long-awaited standard on hedge accounting in November. The changes have been widely accepted by preparers as an improvement. The new guidance provides relief from the 'rules-based' approach in IAS 39 and is likely to allow hedge accounting in more circumstances.

The 'amendments' to IFRS 9 represent the third phase of the project to replace IAS 39 as the standard on financial instruments accounting. The first phase is 'classification and measurement' and the second phase is 'impairment'.

The amendments also introduce changes to the disclosure requirements in IFRS 7.


IFRS 9 applies to all hedge accounting, with the exception of portfolio fair value hedges of interest rate risk (commonly referred to as 'fair value macro hedges'). For these, an entity may apply the hedge accounting requirements in IAS 39. This is largely because the IASB is addressing macro hedge accounting as a separate project.

Until the IASB completes its macro hedging project, entities have a choice to either apply IFRS 9 or continue to apply IAS 39 for hedge accounting. This is to allow entities not to have to change their accounting twice in the space of a few years, that is, once to move to IFRS 9 and again to move to macro hedging when that is completed. This choice is only applicable to hedge accounting; it does not apply to other aspects of IFRS 9.

Who might be interested in continuing to apply IAS 39? Most likely some financial institutions with a high volume of macro hedge accounting may continue with IAS 39. It is expected that most corporates will adopt IFRS 9 to take advantage of the positive changes it introduces.

Entities will need to comply with the new IFRS 7 disclosure requirements regardless of the standard used for hedge accounting (IAS 39 or IFRS 9).

Key proposals

There are a few changes to the accounting requirements, but they are not significant. The debits and credits and presentation in the financial statements will largely remain the same (e.g. the three types of hedges – fair value, cash flow and net investment hedges – continue to exist).

The main changes relate to the hedge effectiveness rules and to the eligibility of items as 'hedged items' and 'hedging instruments'.

IFRS 9 aligns hedge accounting with risk management practices, which is a significant improvement. IAS 39 has been criticised for its 'disconnection' from the way entities economically manage risk.

Hedge effectiveness

The amendments remove the requirement for hedge effectiveness tests to be within the range of 80%-125%. IFRS 9 does not require quantitative hedge assessments and, under certain circumstances, a qualitative assessment may be enough (for example, when the critical terms match). Even though IFRS 9 does not completely remove the need for calculations (for example, hedge ineffectiveness still needs to be recorded in the income statement) the changes to hedge effectiveness will be welcomed by many.

Hedged items

IFRS 9 allows more items to be eligible as hedged items. Let's illustrate this through some examples.

Entities can now hedge risk components in n0n-financial items as long as those components are separately identifiable and reliably measurable.


An entity that manufactures aluminium cans can hedge its exposure to the changes in prices of aluminium arising from its inventory. Under IAS 39, it is not allowed to hedge the aluminium price exposure only, because the price of the aluminium cans is not only comprises the price of aluminium but also contains other elements (for example, other raw materials and labour costs).

Entities can now hedge aggregated exposures (that is, hedged items can also include derivatives).


An entity issues a floating-rate debt denominated in foreign currency. At the time of issuance, the entity is concerned about its exposure to interest-rate risk but is not particularly concerned about its foreign currency risk. At that date, the entity enters into an interest rate swap to hedge its interest rate risk exposure; as a result, the entity has fixed its interest cash flows.

Now let's assume that, one year later, the entity becomes concerned about foreign currency risk and enters into a cross currency swap contract to hedge its foreign currency exposure arising from the same debt (which is now a fixed-rate debt as a result of the combination with the interest-rate swap). IAS 39 does not allow this designation because derivatives are not eligible hedged items.

Hedging instrument

The most significant change from hedge accounting under IAS 39 is that entities can defer the time value of options, the forward element in forward contracts and currency basis spreads in other comprehensive income (OCI). The effect is reclassified to profit or loss (P&L) at the same time the hedged item affects P&L. This change reduces volatility in the income statement.

In general, IFRS 9 is good news, and its adoption will result in more qualifying hedging relationships than under IAS 39.

Effective date and transition

Hedge accounting is to be applied prospectively (with some exceptions).

The mandatory date of application (which was previously 1 January 2015) has been 'temporarily' removed from IFRS 9. The IASB will publish the new mandatory effective date once all phases of IFRS 9 are completed (that is, when the accounting for impairment and some amendments to the classification and measurement are finalised). IFRS 9 (as currently published) is available for immediate application.

Entities can elect to apply IFRS 9 in any of the following ways:

  • The own credit risk requirements for financial liabilities. IFRS 9 as amended in November allows entities to early adopt the requirement to recognise in OCI the changes in fair value arising from changes in the entity's own credit risk in financial liabilities without having to adopt any other changes.
  • Classification and measurement (C&M) requirements for financial assets.
  • C&M requirements for financial assets and financial liabilities.
  • The full current version of IFRS 9 (that is, C&M requirements for financial assets and financial liabilities, and hedge accounting).

The transition provisions described above are likely to change once the IASB completes all phases of IFRS 9. The IASB is expected to finalise all phases of IFRS 9 during 2014 with a mandatory effective date no earlier than 1 January 2017.

The European Union has not yet endorsed any aspect of IFRS 9.


Many entities will apply IAS 19R for the first time in December 2013 year-end accounts. The revised standard was issued in 2011, but the debate did not stop there. Anna Schweizer from PwC's Accounting Consulting Services looks at the key aspects of the revised standard and the most recent developments.

The revised standard on accounting for employee benefits is mandatory for annual periods starting on or after 1 January 2013. The IASB has already issued the first amendment of IAS 19R (effective for annual periods starting on or after 1 July 2014) and the IFRS Interpretations Committee (IC) debated IAS 19 every meeting in 2013. Once you know the answers to the following questions, you will be ready.

The basic questions

Do you use a pre- or post-tax discount rate?

The IC confirmed in July that the discount rate should be a pre-tax discount rate. This is because only taxes payable on benefits or contributions in respect of past service are included in the benefit liability.

What happened to 'actuarial gains and losses' and the 'corridor method'?

'Actuarial gains and losses' were renamed 'remeasurements'. These now comprise:

  • actuarial gains and losses on the defined benefit obligation;
  • the difference between actual investment returns and the return implied by the net interest cost; and
  • the effect of the asset ceiling.

They will continue to be recognised immediately in other comprehensive income (OCI) with no subsequent recycling to net income. The 'corridor method' is no longer allowed.

Do you still spread unvested benefits over a future-service period?

Past-service costs will now be recognised in the period a plan amendment is made.

Will there be a change in the benefit expense compared to last year?

It would depend on whether the OCI option or the corridor method was applied previously; the expense could increase or decrease.

The annual expense for a funded plan now includes net interest expense or income. This replaces the finance charge and expected return on assets under old IAS 19. The discount rate is typically lower than the expected return on assets assumption, so the income statement charge is likely to increase. However, this is offset by a movement in OCI, leading to no effect on total comprehensive income level. If you were using the corridor method, you might see a decrease of expense because you are no longer amortising losses.

Will the presentation in the income statement and the notes be different?

Benefit cost will be split into the following categories, either in the income statement or the notes: (1) service cost; (2) past-service cost, settlements and curtailments (benefit changes); and (3) finance expense or income.

IAS 19R is likely to result in more extensive disclosure than before. The requirements include explanations about:

  • the characteristics of plans,
  • the amounts recognised,
  • the effect on future cash flows including timing, amount and uncertainty,
  • the risks specific to the entity arising from the plans,
  • categories of assets based on risks / nature,
  • actuarial assumptions,
  • reconciliations,
  • future cash flows, and
  • extended disclosures for multi-employer plans.

This might seem like a long list, but the good news is that the amendment replaced the prior checklist approach, the objective being to provide relevant information when plans are material to the entity. Management will need to apply judgement when deciding what needs to be disclosed.

Can I treat expenses and taxes relating to employee benefit plans as before?

It depends on how you treated them before. The revised standard provides additional guidance on expenses and taxes. Taxes should be included either in the return on assets or in the calculation of the benefit obligation, depending on their nature. Investment management costs should be recognised as part of the return on assets. Other costs should be recognised as period costs when incurred.

Does the treatment of termination benefits stay the same?

In principle, the accounting has not changed but the definition of termination benefits was tightened, so it might capture fewer arrangements. A benefit that requires future service if it is to be earned is not a termination benefit. The liability is only recognised when the entity can no longer withdraw the offer, which might delay the recognition of voluntary termination benefits.

Were any other definitions changed?

Yes, the definition of 'settlement' was clarified. The payment of benefits provided in the terms of a plan and included in the actuarial assumptions – for example, an option at retirement for employees to take their benefit in the form of a lump sum rather than as a pension or as routine pension payments – are not settlements.

The more complex questions

Does it matter if the employer's exposure is limited and others (such as employees) help meet some of the cost?

Yes. Also, when an employer can use contributions from employees to meet a deficit, this might reduce the defined benefit obligation in some situations.

IAS 19R intended to clarify the accounting for employee contributions, but it was not until the first amendment to IAS 19R was published that the accounting became clearer. The amendment now allows contributions that are linked to service, and that do not vary with the length of employee service, to be deducted from the cost of benefits earned in the period that the service is provided. Contributions that vary according to the length of the employee service must be spread over the service period using the same attribution method applied to the benefits. Contributions that are not linked to service are reflected in the measurement of the benefit obligation.

What discount rate should I use?

The IC concluded that a project to provide more guidance around discount rates would be too broad for it to address efficiently. However, it included some helpful observations in a recent agenda decision.

The discount rate:

  1. reflects the time value of money but not actuarial or investment risk;
  2. does not reflect entity-specific credit risk;
  3. does not reflect the risk that future experience may differ from actuarial assumptions; and
  4. reflects the currency and estimated timing of benefit payments.

The IC also observed that high-quality is an absolute notion whose interpretation should be consistent over time. It should be based on international or global credit ratings, not local or national ones.

The open questions

The IASB is still working on its research project on discount rates. The IC's work in progress includes employee benefit plans with a guaranteed return on contributions or notional contributions. So we are looking forward to what the next year will bring in the area of IAS 19 and will keep you posted.

For all the IAS 19 changes in more detail, please see the 'Practical guide', the 'Straight away': 'IASB issues amendments to IAS 19R' and the 'Straight away': 'IFRS Interpretations Committee concludes on IAS 19 discount rates'.

IASB and PwC insight into IFRS developments –Meet the Experts 2013

This year's 'Meet the Experts' conference provided a forum for over 400 delegates – PwC clients, partners and staff from around the world – to learn about and discuss developments in IFRS, in the economy and in the regulatory environment.

We heard about the IASB agenda from chairman Hans Hoogervorst and Board Member Stephen Cooper; the focus of the regulators from the UK's Financial Reporting Council Chairman Richard Fleck and former SEC senior accountant and PwC partnerWayne Carnall; economic factors and trends from PwC Senior Economic Adviser Andrew Sentance; and panel discussions that included preparers and IFRS specialists from PwC.

Visit to read the key themes emerging from these speeches, debates and Q&As, including some of the results of our quick-fire poll questions, or if you would like to find out more about the event and how to join us next year.

To read this Newsletter in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.