IFRIC guidance on hedges of a net investment in a foreign operation

03 July 2008

IFRIC 16 states that the presentation currency does not create an exposure to which an entity may apply hedge accounting. The hedging instruments may be held by any entity or entities within the group.

The main expected change in practice is to eliminate the possibility of an entity applying hedge accounting for a hedge of the foreign exchange differences between the functional currency of a foreign operation and the presentation currency of the parent’s consolidated financial statements.

 

The IFRIC was asked for guidance on accounting for the hedge of a net investment in a foreign operation in an entity’s consolidated financial statements. Practice has diverged as a result of differing views on which risks are eligible for hedge accounting according to IFRS.

 

IFRIC 16 states that the presentation currency does not create an exposure to which an entity may apply hedge accounting. The hedging instruments may be held by any entity or entities within the group.

 

IFRIC 16 applies to an entity that hedges the foreign currency risk arising from its net investments in foreign operations and wishes to qualify for hedge accounting in accordance with IAS 39. It does not apply to other types of hedge accounting.

 

The Interpretation is effective for annual periods beginning on or after 1 October 2008 .

 

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