BC6.427 IAS 39 restricted the application of hedge accounting for groups of items. For example, hedged items that together constitute an overall net position of assets and liabilities could not be designated into a hedging relationship with that net position as the hedged item. Other groups were eligible if the individual items within that group had similar risk characteristics and shared the risk exposure that was designated as being hedged. Furthermore, the change in the fair value attributable to the hedged risk for each individual item in the group had to be approximately proportional to the overall change in the fair value of the group for the hedged risk. The effect of those restrictions was that a group would generally qualify as a hedged item only if all the items in that group would qualify for hedge accounting for the same hedged risk on an individual basis (ie each as an individual hedged item).

BC6.428 In response to the Discussion Paper Reducing Complexity in Reporting Financial Instruments, many commented that restricting the ability to achieve hedge accounting for groups of items, including net positions, had resulted in a hedge accounting model that was inconsistent with the way in which an entity actually hedges (ie for risk management purposes). Similar concerns about the restrictions of IAS 39 for applying hedge accounting to groups of items were raised as part of the IASB’s outreach activities for its Hedge Accounting project.

BC6.429 In practice, most entities hedge their risk exposures using different approaches, resulting in hedges of:

(a) individual items;