Pre-transition cash flow hedges
Case 1: All hedge accounting conditions met from date of transition and thereafter
In 2004 Entity A borrowed €10m from a bank. The terms of the loan provide that a coupon of 3 month LIBOR plus 2% is payable quarterly in arrears and the principal is repayable in 2019. In 2007, Entity A decided to ‘fix its coupon payments for the remainder of the term of the loan by entering into a twelve-year pay-fixed, receive-floating interest rate swap. The swap has a notional amount of €10m and the floating leg resets quarterly based on 3 month LIBOR.
In Entity A”s final financial statements prepared under its previous GAAP, the swap was clearly identified as a hedging instrument in a hedge of the loan and was accounted for as such. The fair value of the swap was not recognised in Entity A”s balance sheet and the periodic interest settlements were accrued and recognised as an adjustment to the loan interest expense. On 1 January 2012, Entity A”s date of transition to IFRSs, the loan and the swap were still in place and the swap had a positive fair value of €1m and a €nil carrying amount. In addition, Entity A met all the conditions in IAS 39 to permit the use of hedge accounting for this arrangement throughout 2012 and 2013.
In its opening IFRS statement of financial position Entity A should:
- recognise the interest rate swap as an asset at its fair value of €1m; and
- credit €1m to a separate component of equity, to be reclassified to profit or loss as the hedged transactions (future interest payments on the loan) affect profit or loss.
In addition, hedge accounting would be applied throughout 2012 and 2013.
Case 2: Hedge terminated prior to date of transition
The facts are as in Case 1 except that in April 2011 Entity A decided to terminate the hedge and the interest rate swap was settled for its then fair value of €1.5m. Under its previous GAAP, Entity A”s stated accounting policy in respect of terminated hedges was to defer any realised gain or loss on terminated hedging instruments where the hedged exposure remained. These gains or losses would be recognised in profit or loss at the same time as gains or losses on the hedged exposure. At the end of December 2011, A”s balance sheet included a liability (unamortised gain) of €1.4m.
IFRS 1 does not explicitly address hedges terminated prior to the date of transition but we see no reason why these relationships should not be reflected in an entity”s opening IFRS statement of financial position in the same way as other cash flow hedges that are reflected in an entity”s closing balance sheet under its previous GAAP. Accordingly, in its opening IFRS statement of financial position Entity A should:
- remove the deferred gain of €1.4m from the balance sheet; and
- credit €1.4m to a separate component of equity, to be reclassified to profit or loss as the hedged transactions (future interest payments on the loan) affect profit or loss.