IFRS 9 Financial Instruments

1 Implementation Guidance International Financial Reporting Standard November 2013 Hedge Accounting and amendments to ifrs 9, ifrs 7 and IAS 39 ifrs 9 Financial InstrumentsIFRS9 FinancialInstruments(HedgeAccountinganda mendmentstoIFRS9,IFRS7andIAS39)Implement ationGuidanceThis Implementation Guidance accompanies ifrs 9 Financial Instruments (Hedge Accountingand amendments to ifrs 9, ifrs 7 and IAS 39) (issued November 2013; see separate booklet)and is published by the International Accounting Standards Board (IASB).Disclaimer:the IASB, the ifrs Foundation, the authors and the publishers do not acceptresponsibility for any loss caused by acting or refraining from acting in reliance on thematerial in this publication, whether such loss is caused by negligence or Financial Reporting Standards (including International Accounting Standardsand SIC and IFRIC Interpretations), Exposure Drafts and other IASB and/or ifrs Foundationpublications are copyright of the ifrs 2013 ifrs Foundation ISBN for this part: 978-1-909704-16-9.

2 ISBN for the set of three parts: 978-1-909704-13-8 All rights part of this publication may be translated, reprinted, reproducedor used in any form either in whole or in part or by any electronic, mechanical or othermeans, now known or hereafter invented, including photocopying and recording, or in anyinformation storage and retrieval system, without prior permission in writing from theIFRS approved text of International Financial Reporting Standards and other IASB publications is that published by the IASB in the English language. Copies may be obtainedfrom the ifrs Foundation. Please address publications and copyright matters to: ifrs Foundation Publications Department30 Cannon Street, London EC4M 6XH, United KingdomTel: +44 (0)20 7332 2730 Fax: +44 (0)20 7332 2749 Email: Web: ifrs Foundation logo/the IASB logo/the ifrs for SMEs logo/ Hexagon Device , IFRSF oundation , eIFRS , IASB , ifrs for SMEs , IAS , IASs , IFRIC , ifrs , IFRSs , SIC , International Accounting Standards and International Financial Reporting Standards areTrade Marks of the ifrs ifrs Foundation is a not-for-profit corporation under the General Corporation Law ofthe State of Delaware, USA and operates in England and Wales as an overseas company(Company number.)

3 FC023235) with its principal office as ON IMPLEMENTING ifrs 9 FINANCIALINSTRUMENTSILLUSTRATIVE EXAMPLESAPPENDIXA mendments to the guidance on other IFRSsTABLES OF CONCORDANCEIMPLEMENTATIONGUIDANCE ONHEDGEACCOUNTING ifrs Foundation3 ifrs 9 Financial InstrumentsIllustrative examplesThese examples accompany, but are not part of, ifrs 9 This publication amends some existing paragraphs and adds paragraphs IE7 the paragraphs that have been amended are included, or those that are there forease of reference. No mark-up has been used; instead the amended paragraph shouldbe replaced in liabilities at fair value through profit or lossIE1 The following example illustrates the calculation that an entity might performin accordance with paragraph of ifrs 1 January 20X1 an entity issues a 10-year bond with a par value ofCU150,0001and an annual fixed coupon rate of 8 per cent, which is consistentwith market rates for bonds with similar entity uses LIBOR as its observable (benchmark) interest rate.

4 At the date ofinception of the bond, LIBOR is 5 per cent. At the end of the first year:(a)LIBOR has decreased to per cent.(b)the fair value for the bond is CU153,811, consistent with an interest rateof per entity assumes a flat yield curve, all changes in interest rates result from aparallel shift in the yield curve, and the changes in LIBOR are the only relevantchanges in market entity estimates the amount of change in the fair value of the bond that isnot attributable to changes in market conditions that give rise to market risk asfollows:1 In this guidance monetary amounts are denominated in currency units (CU).2 This reflects a shift in LIBOR from 5 per cent to per cent and a movement of per centwhich, in the absence of other relevant changes in market conditions, is assumed to reflect changesin credit risk of the 9 FINANCIALINSTRUMENTS NOVEMBER2013 ifrs Foundation4[paragraph (a)]First, the entity computes the liability sinternal rate of return at the start of theperiod using the observed market price ofthe liability and the liability s contractualcash flows at the start of the period.

5 Itdeducts from this rate of return theobserved (benchmark) interest rate at thestart of the period, to arrive at aninstrument-specific component of theinternal rate of the start of the period of a 10-year bondwith a coupon of 8 per cent, the bond sinternal rate of return is 8 per the observed (benchmark) interestrate (LIBOR) is 5 per cent, theinstrument-specific component of theinternal rate of return is 3 per cent.[paragraph (b)]Next, the entity calculates the presentvalue of the cash flows associated with theliability using the liability s contractualcash flows at the end of the period and adiscount rate equal to the sum of (i) theobserved (benchmark) interest rate at theend of the period and (ii) theinstrument-specific component of theinternal rate of return as determined inaccordance with paragraph (a).The contractual cash flows of theinstrument at the end of the period are: interest: CU12,000(a)per year foreach of years 2 10. principal: CU150,000 in year discount rate to be used to calculatethe present value of the bond is thus cent, which is the end of period LIBOR rate of per cent, plus the 3 per centinstrument-specific gives a present value of CU152,367.

6 (b)[paragraph (c)]The difference between the observedmarket price of the liability at the end ofthe period and the amount determined inaccordance with paragraph (b) is thechange in fair value that is not attributableto changes in the observed (benchmark)interest rate. This is the amount to bepresented in other comprehensive incomein accordance with paragraph (a).The market price of the liability at the endof the period is CU153,811.(c)Thus, the entity presents CU1,444 in othercomprehensive income, which isCU153,811 CU152,367, as the increase infair value of the bond that is notattributable to changes in marketconditions that give rise to market risk.(a)CU150,000 8% = CU12,000(b)PV = [CU12,000 (1 (1 + )-9) ] + CU150,000 (1 + )-9(c)market price = [CU12,000 (1 (1 + )-9) ] + CU150,000 (1 + )-9 Disclosures on Transition from IAS 39 to ifrs 9IE6 The following illustration is an example of one possible way to meet thequantitative disclosure requirements in paragraphs 44S 44W of ifrs 7 at thedate of initial application of ifrs 9.

7 However, this illustration does not addressall possible ways of applying the disclosure requirements of this ONHEDGEACCOUNTING ifrs Foundation5 Hedge accounting for aggregated exposuresIE7 The following examples illustrate the mechanics of hedge accounting foraggregated 1 combined commodity price risk and foreigncurrency risk hedge (cash flow hedge/cash flow hedgecombination)Fact patternIE8 Entity A wants to hedge a highly probable forecast coffee purchase (which isexpected to occur at the end of Period 5). Entity A s functional currency is itsLocal Currency (LC). Coffee is traded in Foreign Currency (FC). Entity A has thefollowing risk exposures:(a)commodity price risk: the variability in cash flows for the purchase price,which results from fluctuations of the spot price of coffee in FC; and(b)foreign currency (FX) risk: the variability in cash flows that result fromfluctuations of the spot exchange rate between LC and A hedges its risk exposures using the following risk management strategy:(a)Entity A uses benchmark commodity forward contracts, which aredenominated in FC, to hedge its coffee purchases four periods beforedelivery.

8 The coffee price that Entity A actually pays for its purchase isdifferent from the benchmark price because of differences in the type ofcoffee, the location and delivery gives rise to the riskof changes in the relationship between the two coffee prices (sometimesreferred to as basis risk ), which affects the effectiveness of the hedgingrelationship. Entity A does not hedge this risk because it is notconsidered economical under cost/benefit considerations.(b)Entity A also hedges its FX risk. However, the FX risk is hedged over adifferent horizon only three periods before delivery. Entity A considersthe FX exposure from the variable payments for the coffee purchase in FCand the gain or loss on the commodity forward contract in FC as oneaggregated FX exposure. Hence, Entity A uses one single FX forwardcontract to hedge the FX cash flows from a forecast coffee purchase andthe related commodity forward following table sets out the parameters used for Example 1 (the basisspread is the differential, expressed as a percentage, between the price of thecoffee that Entity A actually buys and the price for the benchmark coffee):3 For the purpose of this example it is assumed that the hedged risk is not designated based on abenchmark coffee price risk component.

9 Consequently, the entire coffee price risk is 9 FINANCIALINSTRUMENTS NOVEMBER2013 ifrs Foundation6 Example 1 ParametersPeriod12345 Interest rates forremaining maturity [FC] rates forremaining maturity [LC] price [FC/lb] rate (spot) [FC/LC] mechanicsIE11 Entity A designates as cash flow hedges the following two hedgingrelationships:4(a)A commodity price risk hedging relationship between the coffee pricerelated variability in cash flows attributable to the forecast coffeepurchase in FC as the hedged item and a commodity forward contractdenominated in FC as the hedging instrument (the first levelrelationship ). This hedging relationship is designated at the end ofPeriod 1 with a term to the end of Period 5. Because of the basis spreadbetween the price of the coffee that Entity A actually buys and the pricefor the benchmark coffee, Entity A designates a volume of 112,500pounds (lbs) of coffee as the hedging instrument and a volume of 118,421lbs as the hedged (b)An FX risk hedging relationship between the aggregated exposure as thehedged item and an FX forward contract as the hedging instrument (the second level relationship ).

10 This hedging relationship is designated atthe end of Period 2 with a term to the end of Period 5. The aggregatedexposure that is designated as the hedged item represents the FX riskthat is the effect of exchange rate changes, compared to the forward FXrate at the end of Period 2 (ie the time of designation of the FX riskhedging relationship), on the combined FX cash flows in FC of the twoitems designated in the commodity price risk hedging relationship,which are the forecast coffee purchase and the commodity forwardcontract. Entity A s long-term view of the basis spread between the priceof the coffee that it actually buys and the price for the benchmark coffee4 This example assumes that all qualifying criteria for hedge accounting are met (see ifrs ).The following description of the designation is solely for the purpose of understanding this example(ie it is not an example of the complete formal documentation required in accordance withIFRS (b)).