IFRS 9 - Off market derivative in a new hedging relationship

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Anushree.gupta
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Joined: 11 Nov 2021, 11:20

IFRS 9 - Off market derivative in a new hedging relationship

Post by Anushree.gupta »

Hi all,

I have a CCIRS designated against a debt in a cash flow hedge. The CCIRS was restructured (maturity and interest rate restructured) and as a result the existing hedging relationship was discontinued. Since the debt still exists (and the hedged item cash flows as a result are still highly probable to occur) the accumulated amounts in the OCI can stay crystallised till the time the debt does not mature.

The new restructured CCS however are now being designated into a new hedging relationship with the same existing debt. Because these are not brand new on market derivatives, they have an existing FV (i.e., these are non zero fair value derivatives at inception). My questions are:

1. Am I right in saying that the accumulated amounts in the OCI relating to the old hedging relationship can stay in the OCI till the hedged item (i.e., debt) matures?
2. Does all Day 1 FV relating to the off-market CCS in the new relationship have to be recycled to P/L immediately? Or can this be amortized over life of new CCS?

Can you point me to the accounting standards guidance (IFRS 9) that helps with this please as I've been unable to find a definitive answer.

Thanks in advance.
pub_acco
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Re: IFRS 9 - Off market derivative in a new hedging relationship

Post by pub_acco »

IFRS 9.6.5.12 says the cash flow hedge reserve related to a discontinued hedge remains there until the future cash flow occurs.

As for the second point, how did the day 1 gain/loss arise? A CCS is usually configured to be a zero-FV contract by adjusting spreads and prepaid premium so it is not favorable or unfavorable to either party. If you did enter a favorable or unfavorable contract for no reason, I'd cast doubt on the economic relationship between the day 1 gain/loss and the hedging activity.
Leo
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Re: IFRS 9 - Off market derivative in a new hedging relationship

Post by Leo »

IFRS 9.6.5.12 says the cash flow hedge reserve related to a discontinued hedge remains there until the future cash flow occurs.

It means it can't stay in OCI until the debt matures and has be to recycle into P&L at the first payment of the debt.

But if the debt is to be reimbursed in full at maturity, so it can be remained in OCI until the end right?
Anushree.gupta
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Joined: 11 Nov 2021, 11:20

Re: IFRS 9 - Off market derivative in a new hedging relationship

Post by Anushree.gupta »

pub_acco wrote: 12 Nov 2021, 05:16 IFRS 9.6.5.12 says the cash flow hedge reserve related to a discontinued hedge remains there until the future cash flow occurs.

As for the second point, how did the day 1 gain/loss arise? A CCS is usually configured to be a zero-FV contract by adjusting spreads and prepaid premium so it is not favorable or unfavorable to either party. If you did enter a favorable or unfavorable contract for no reason, I'd cast doubt on the economic relationship between the day 1 gain/loss and the hedging activity.
Thank you for confirming on point 1. As to point 2, the old CCS were restructured (as in their existing MtM was embedded to get a new CCS with a longer maturity and with a different % and spread) and hence there was a day 1 FV. The economic relationship still exists because in essence it is the same CCS (i.e. same currency pair) against the same old debt. I have called the ICAEW helpline to ask but they haven't been able to give me a definitive response as well.

Thanks again.
pub_acco
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Re: IFRS 9 - Off market derivative in a new hedging relationship

Post by pub_acco »

Anushree,

So you've got a favorable or unfavorable contract thanks to the value of old CCS. In this sense, I'd see the initial gain/loss as a termination gain/loss of the old CCS rather than a day 1 thing of the new one. Such a termination gain/loss might go to OCI to the extent it is covered by the hedging activity; otherwise, it will go directly to P&L.

Leo,

You don't usually need to recycle everything at the first payment. Bullet repayment, amortization, and interest payments are usually all future cash flows against which a CCS hedges. So you can recycle OCI as the cash flows occur.
Leo
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Re: IFRS 9 - Off market derivative in a new hedging relationship

Post by Leo »

Very clear thanks !
Anushree.gupta
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Joined: 11 Nov 2021, 11:20

Re: IFRS 9 - Off market derivative in a new hedging relationship

Post by Anushree.gupta »

That makes sense, thank you!
hubertd
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Re: IFRS 9 - Off market derivative in a new hedging relationship

Post by hubertd »

Did you receive/pay any fee to your counterparty in relation to off market CCS?
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