Introduction to Hedge Accounting

Hedge accounting requires the hedged item and hedging instrument to be identified and designated at the inception of the hedge. The hedged item can be an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation, or a group of any such items.

Most derivative financial instruments may be designated as hedging instruments, provided they are with an external party.

The Recognition and Measurement of Financial Instruments under IAS39 is replaced by IFRS9, which deals with Accounting of Financial Instruments in 2018.

Hedge accounting is optional under both IAS39 and IFRS9 and the main differences between IFRS9 and IAS39 are as follows:

• The scope for hedging instruments has been extended for broader range of hedging instruments.
• A non-financial hedged item no longer must be hedged in its entirety but for specific risk components.
• The hedge effectiveness test is simplified using principle-based criteria.
• With IFRS9, changes to the hedge relationship are allowed without the need for termination.

The fully integrated architecture for IFRS solution includes Hedge Accounting that provides a framework based on the hedge effectiveness results that should be fed from an external system.

Temenos Transactsupports Hedge Accounting under IAS39 with the International Hedge Accounting (IH) module and is as follows:

• Specifies the hedge types (fair value, cash flow or investments).
• Documents the hedge relationship.
• Defines accounting rules based on the hedge types.
• Provides a framework for generating hedge accounting entries.