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 Other Comprehensive Income (OCI).|
IFRIC 16 – Accounting
- [Accounting treatment 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 (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)