Chapter 2The Theoretical Framework – Hedge Accounting

The objective of this chapter is to summarise the key theoretical issues surrounding hedge accounting under IFRS 9. This chapter also covers the fair valuation of derivatives under IFRS 13 Fair Value Measurement, a standard that has a substantial effect on hedge accounting.


Whilst other instruments (e.g., a loan denominated in a foreign currency) may also be used, derivatives are the most common instruments transacted to reduce or mitigate exposures to market risks.

2.1.1 Derivative Definition

Under IFRS 9, a derivative is a financial instrument (or other contract within the scope of IFRS 9) with all of the following characteristics:

  1. Its value changes in response to changes in a specified “underlying” interest rate, financial instrument price, commodity price, foreign exchange (FX) rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.
  2. It requires no initial investment, or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.
  3. It is settled at a future date.

Some commodity-based derivatives are not considered derivatives under IFRS 9. See Chapter 10 for a detailed discussion regarding which commodity contracts can be treated as ...

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