IFRIC 16 DESCRIBES Hedges of a Net Investment in a Foreign Operation, and STATES that the Presentation Currency does NOT create an exposure, the hedging instrument May-be held by any entity, IAS 21 to be applied in respect of the hedged item.
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IFRIC 16 – Key Terms
1. Foreign Operation
An ENTITY that is a Subsidiary, Associate, Joint Venture, or Branch of a Reporting Entity, the activities of which are based or conducted in a country or currency OTHER than those of the reporting entity.
2. Net Investment in a Foreign Operation
The amount of reporting entity’s interest in the NET ASSETS of that operation.
| (a) It is a HEDGE of an entity’s interest in the net assets of a foreign operation. |
| (b) It can be APPLIED only to foreign exchange differences arising between the parent’s functional currency and the foreign operation’s functional currency. |
| (c) Hedging Instrument May-be held by any entity within the group. |
| (d) Hedge Accounting of the foreign exchange RISK of the ‘Net Investment in a Foreign Operation’ only applies in financial statements, where the interest in the foreign operation is INCLUDED in the investing company’s share of its net assets. |
| (e) Under IAS 21, the net assets of a foreign subsidiary are TRANSLATED at the end of each financial year, and any foreign exchange differences are recognized in (OCI). |
IFRIC 16 – Accounting
- [Accounting for Hedge Instrument is the Same as for ‘Cash Flow Hedge‘]. Effective Portion of Gain/loss is recognized in OCI, whereas Ineffective Portion of Gain/loss is recognized in P&L.
- Upon disposal of the foreign operation, the following foreign exchange translation reserve will be reclassified in P&L:
| (a) Cumulative translation reserve As Per (IAS 21) recorded on Consolidation of Net Investment; AND |
| (b) Cumulative effective Gain/loss As Per (IFRS 9) on Hedging Instrument. |
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia