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HMRC internal manual

Corporate Finance Manual

Accounting for corporate finance: hedging: IAS 39: hedging currency risk on intra group transactions

Hedging intragroup monetary items

As with hedging instruments, for hedge accounting purposes, only assets, liabilities, firm commitments or highly probable forecast transactions that involve a party external to the entity can be designated as hedged items - see CFM27040. However, there are two exceptions in respect of the hedging of the foreign currency risk of:

  • Intra-group monetary items
  • Forecast intra-group transactions.

Intra-group monetary items

The foreign currency risk of an intra-group monetary item (for example a payable/receivable between two subsidiaries) may qualify as a hedged item in the consolidated financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully eliminated on consolidation in accordance with IAS 21 ‘The effects of changes in foreign exchange rates’. In accordance with IAS 21, foreign exchange rate gains and losses on intra-group monetary items are not fully eliminated on consolidation when the intra-group monetary item is transacted between two group entities that have different functional currencies.

Forecast intra-group transactions

The foreign currency risk of a highly probable forecast intra-group transaction may qualify as a hedged item in consolidated financial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss (this was the subject of an amendment to IAS 39 issued in April 2005).