AFFECTS: Entities reporting under IFRSs that engage in derivative and hedging activities.
SUMMARY: On July 31, 2008, the IASB issued . The amendments focus on two areas in which hedge accounting has been inconsistent: (1) identifying inflation as a hedged risk or portion and (2) hedging with options.
Identifying Inflation as a Hedged Risk or Portion
The amendments clarify that inflation may be hedged only when changes in inflation constitute a contractually specified portion of cash flows of a recognized financial instrument and other cash flows of the financial instrument “are not affected by the inflation portion” (e.g., when an entity acquires or issues inflation-linked debt). In such circumstances, the entity’s cash flows are exposed to changes in future inflation that may be cash-flow-hedged. The amendments, therefore, do not permit an entity to designate an inflation component of issued or acquired fixed-rate debt in a fair value hedge because the IASB considers such a component not separately identifiable and reliably measurable.
NEXT STEPS: The amendment is effective retrospectively for annual periods beginning on or after July 1, 2009. Earlier adoption is permitted.
IFRIC Issues Interpretation on Construction of Real Estate
AFFECTS: Entities reporting under IFRSs that construct rental units.
SUMMARY: On July 3, 2008, the IFRIC issued , which helps entities that construct rental units, such as apartments or houses, determine whether a particular construction agreement is within the scope of IAS 11 or IAS 18. At issue is whether such an agreement constitutes a construction contract under IAS 11. If so, an entity should use the percentage-of-completion method to recognize revenue. If not, the entity should account for the agreement under IAS 18, which requires that revenue be recognized upon delivery of a good or service.
NEXT STEPS: The Interpretation is effective retrospectively for annual periods beginning on or after January 1, 2009.
IFRIC Issues Interpretation on Hedges of a Net Investment in a Foreign Operation
AFFECTS: Entities reporting under IFRSs that hedge the foreign currency risk arising from a net investment in a foreign operation.
SUMMARY: On July 3, 2008, the IFRIC issued , which provides guidance on which risks are eligible for hedge accounting for a net investment in a foreign operation. Existing hedge accounting guidance in IAS 21 and IAS 39 does not explicitly address this topic.
NEXT STEPS: The Interpretation is effective prospectively for annual periods beginning on or after October 1, 2008.
IASB Issues Amendments Permitting Reclassification of Financial Instruments
AFFECTS: Entities reporting under IFRSs.
SUMMARY: On October 13, 2008, the IASB issued amendments to IAS 39 and IFRS 7 regarding the reclassification of financial instruments. The amendments are in response to calls from constituents, particularly within the European Union, to align the guidance on such reclassification in IFRSs with that in U.S.
NEXT STEPS: The amendments became effective on July 1, 2008.