Hedges of a net investment in a foreign operation
Comments from ACCA
October 2007
ACCA is pleased to have this opportunity to comment on the draft Interpretation D22, which has been considered by ACCA's Financial Reporting Committee.
The interpretation aims to clarify two key issues in accounting for hedges of net investments in consolidated accounts. These issues have arisen from the limited guidance on net investment hedges in IAS39 and the unclear interaction between the requirement of IAS39 and IAS21, which could therefore lead to conflicting interpretations.
1. Is the hedged risk the exposure between the two entities with different functional currencies in a group or is it the exposure between the presentation currency of the group and the functional currency of the entity being hedged?
We agree with the IFRIC in that what constitutes the hedge is the hedging of the risk between the functional currency of the foreign operation and the functional currency of the reporting parent entity. The conclusions of the Interpretation are reasonable, in that if any parent company (immediate, intermediate or ultimate) must prepare general purpose financial statements, it can hedge its net investment in a foreign operation on the basis of the intermediate parent's functional currency, even if that currency is different from that of the ultimate group parent company.
2. Where within a group may the hedging instrument be held?
We would agree with the conclusion in the Interpretation that it does not matter where within the consolidated group the hedging instruments were held, provided that the instrument is considered effective