Remove the numerical thresholds

IFRS 9 aimed to simplify IAS 39 and bring accounting closer to real-world risk management practices.

One of the biggest changes was moving away from strict numerical thresholds for hedge effectiveness, like the 80%-125% range under IAS 39.

Instead, IFRS 9 allows companies to use a more flexible, principles-based approach.

As long as there’s a clear economic relationship between the hedging instrument and the item being hedged, the hedge can qualify for accounting treatment.

This change made the rules easier to apply and less restrictive.

Realignment with risk management

New requirement aligns hedge accounting more closely with the risk management activities of an entity.

This facilitates the entity to fully reflect its risk management activities in the financial statements.

Hedge accounting will be closely and tightly coupled with the objective of hedging in such a way that it reflects the entity’s risk management activities in the financial statements.

Expanding the types of risks

Another improvement was expanding the types of risks and instruments that could qualify for hedge accounting.

Under IAS 39, the focus was mostly on financial risks like interest rate and currency risks.

IFRS 9 widened the scope to include other types of risks, like commodity price risks and even credit risks, which made it more relevant to industries like energy, agriculture, and others that manage non-financial risks.

Concept of rebalancing

IFRS 9 also made hedge accounting more flexible by introducing the concept of “rebalancing.”

This allows companies to adjust their hedging relationships as their risk management strategies evolve, without automatically having to stop hedge accounting.

Discontinuation of hedge accounting

Discontinuing hedge accounting also became less rigid and mechanical under the new standard.

The types of hedges themselves didn’t change — IFRS 9 still supports fair value hedges, cash flow hedges, and hedges of net investments.

But it simplified how these are applied and assessed, making the overall process much smoother.

Transparency and disclosures

Lastly, IFRS 9 placed a strong emphasis on transparency.

Companies now have to provide more detailed disclosures about their risk management strategies, the purpose of their hedges, and how hedge accounting affects their financial statements.

In summary, IFRS 9’s hedge accounting rules are much more user-friendly and practical, helping businesses better align their accounting with how they actually manage risks in real life.

Hedge Accounting Clarity: Discover the Shift from IAS 39 to IFRS 9! was originally published in RVSBELL ACADEMY on Medium, where people are continuing the conversation by highlighting and responding to this story.