Application of the ‘highly probable’ criterion

IFRS 9 (and IAS 39) permit forecast transactions to be designated as hedged items on condition that they are deemed to be ‘highly probable’.

Keywords: Mazars, Thailand, IFRS, IFRS IC, IFRS 9, IAS 39

29 May 2019

The request put to the IFRS IC asked how the ‘highly probable’ criterion should be applied when the notional amount of the hedging instrument (load following swap) is dependent on the outcome of a hedged transaction (forecast energy sales).

The Committee reached the following conclusions:

  • The fact that the Board did not carry forward the hedge accounting section of the IAS 39 Implementation Guidance into IFRS 9 does not mean it has rejected that guidance. In particular, this section includes additional guidance on hedging forecast transactions that is relevant here.
  • When assessing whether a forecast transaction is highly probable, an entity must take account of uncertainty relating to both its timing and its magnitude (IAS 39.IG F3.7 and IAS 39.IG F3.11).
  • In order for the forecast transaction to be eligible for a cash flow hedge, it must be documented with sufficient specificity that the entity can identify it when it occurs. Thus, specifying a percentage of forecast sales during a period is not sufficient as the entity would be unable to identify the particular transaction (IAS 39.IG F3.10 and IAS 39.IG F3.11).
  • The terms of the hedging instrument (i.e. load following swap) are not taken into account when assessing whether the forecast transaction is highly probable.

Consequently, the hedging relationship described in the fact pattern put to the IFRS IC (hedging all forecast sales, with an adjustment to the derivative to reflect the actual volume of sales) cannot be designated as a cash flow hedge, as the hedged forecast transaction does not meet the criteria to be classified as ‘highly probable’.

The IFRS IC agenda decisions discussed are just a selection of the decisions published in IFRIC Update this month; it can be found on the IASB’s website.