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HMRC internal manual

Corporate Finance Manual

Accounting for corporate finance: hedging: discontinuation of hedge accounting

This guidance applies to companies which apply IFRS 9, New UK GAAP or FRS 26.

When must hedge accounting cease?

Hedge accounting must be discontinued prospectively if:

  1. the hedging instrument expires or is sold, terminated, or exercised;
  2. for cash flow hedges the forecast transaction is no longer expected to occur; or

In certain circumstances under IAS 39/FRS 26 hedge accounting may also cease if the hedge ceases to be highly effective, or if hedge designation is revoked. Under IFRS 9 discontinuation of hedge accounting will be less frequent, as more relaxed rules apply allowing companies to ‘rebase’ hedges which are no longer highly effective. Hedging designation cannot be revoked under IFRS 9 or FRS 102.

Cash flow hedges

If a cash-flow hedge is terminated as a result of a above, amounts recognised directly in equity will continue to be recognised in equity until the forecast transaction occurs, at which point they should be accounted for in accordance with relevant guidance in respect of transfers between equity and profit and loss (CFM27160).

If hedge accounting ceases for a cash flow hedge relationship because the forecast transaction is no longer expected to occur, gains and losses deferred in equity must be taken to the income statement immediately. If the transaction is still expected to occur and the hedge relationship ceases, the amounts accumulated in other comprehensive income (OCI) will be retained in OCI until the hedged item affects profit or loss.

Fair value hedges

If fair value hedges are discontinued, the hedging instrument will continue to be recognised at fair value unless re-designated as the hedging instrument in a new hedge.

If a hedged financial asset or liability that is measured at amortised cost has been adjusted for the gain or loss attributable to the hedged risk in a fair value hedge, there will be a difference between its actual carrying value when the hedge ends, and its carrying value of an ‘unhedged’ basis. This adjustment is amortised to profit or loss over the period to maturity. Amortisation may begin as soon as an adjustment exists and must begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risks being hedged.