IFRIC 16 — Hedges of a Net Investment in a Foreign Operation

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.

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.

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