Hedge of a foreign currency risk of a firm commitment

BC6.272 IAS 39 allowed an entity to choose fair value hedge accounting or cash flow hedge accounting for hedges of the foreign currency risk of a firm commitment. When developing the 2010 Hedge Accounting Exposure Draft, the IASB considered whether it should continue to allow this choice.

BC6.273 The IASB noted that requiring an entity to apply cash flow hedge accounting for all hedges of foreign currency risk of a firm commitment could result in what some regard as ‘artificial’ other comprehensive income and equity volatility (see paragraphs BC6.353–BC6.354). The IASB also noted that, by requiring an entity to apply cash flow hedge accounting, the lower of test would apply to transactions that already exist (ie firm commitments).

BC6.274 However, the IASB also noted that requiring an entity to apply fair value hedge accounting for all hedges of foreign currency risk of a firm commitment would require a change in the type of hedging relationship to a fair value hedge when the foreign currency cash flow hedge of a forecast transaction becomes a hedge of a firm commitment. This results in operational complexity. For example, this would require changing the measurement of ineffectiveness from a ‘lower of’ test to a symmetrical test.

BC6.275 The IASB also noted that for existing hedged items (such as firm commitments) foreign currency risk affects both the cash flows and the fair value of the hedged item and hence has a dual character.