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Intercompany Hedging Agreement

April 10th, 2021

As noted above, the hedge documentation should include a description of how the company will assess whether the hedging relationship meets the coverage efficiency requirements, how sources of hedge inefficiency are analyzed, and how it determines the hedging ratio. The inefficiency of the hedging is the extent to which changes in the fair value or cash flows of the hedging instrument are greater or lower than those of the hedging instrument and are immediately accounted for in P/L (IFRS 9.B6.4.1). Refocusing is a term used in IFRS 9, which refers to adjustments to the reported amounts of the covered element or hedging instrument of a pre-existing hedging relationship, in order to maintain a coverage ratio consistent with coverage efficiency requirements. The reorientation is counted as the continuation of the security relationship with immediate recognition of the ineffectiveness of the precautionary measures. The reorientation does not apply when the risk management objective for a hedging relationship has changed. Instead, the safeguard accounting of this hedging relationship should be terminated. Additional explanations and examples can be found in IFRS 9.B6.5.7-21. The objective of speculative accounting is to present the effects of the risk management activities of an entity that uses financial instruments to manage exposures resulting from certain risks that may affect P/L or IIC (IFRS 9.6.1.1). If there were no specific requirements for speculative accounting, many risk management strategies could create an accounting conflict, since assets/liabilities that constitute a hedging relationship ,,, constitute a hedging relationship (e.g.B. stocks and fair value derivatives), different accounting rules may apply.

There must be an economic relationship between the covered element and the coverage instrument in order for the coverage to meet the coverage effectiveness criterion. This means that the hedging instrument and the hedged element have values that, because of the same risk, i.e. guaranteed risk, generally move in the opposite direction. This does not mean that the values of the cover instrument and the saved object are always and without exception in opposite directions. See IFRS paragraphs 9.B6.4.4-6; B6.4.14 for further discussions. As an illustration, an intercompany loan should be considered in which a PARENT company operating in USD lends US dollars to its EUR-functional subsidiary.

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