Gains and losses on foreign currency borrowings can be used to hedge the net investment in a foreign subsidiary. How are these reported in the consolidated financial statements? In addition, what other techniques may a company use to hedge net investments?
The gains and losses which arise from the investments done in international countries or from the foreign currency borrowings can be used for the hedging of balance sheet exposure can be treated in the similar manner the hedging items are treated and are intended to cover. The foreign currency, if it is a functional currency, then the gains arising from the hedging instruments as well as the losses from the instruments of hedging would be considered to the “Comprehensive Income. For instance, the US Dollar is considered as the practical currency, then the losses and gains recurred on the instruments of hedging would counterbalance by the relative re-measurement losses and gains.
The IFRIC 16, Paragraphs 3, 5-7, 14, and 16 are updated as The Hedging of the Net Investment in overseas Operations as per IFRS 9 Financial Instruments References. As per these paragraphs, the IFRS 9 needs to designate the eligible hedged item and instrument in the hedge accounting relationship. Looking at the scenario of the net investment hedge, any losses or gains from this instrument is found to be the instrument of hedge for investment, then it should be recognized as the comprehensive income and should be incorporated in the differences of overseas exchange which rose from the conversion of the financial position of the foreign operations (Deloitte, 2009).
The IFRS 9 and IAS 21 need cumulative amounts which were recognized in the comprehensive income related to the losses and gains from the instruments of hedging by hedging an investment is to be reclassified to the Profit / Loss from equity as the reclassification alteration if the parent intends to dispose of the foreign operations (Deloitte, 2017).
The IAS 39 needs the designation of the net investment hedge losses and gains in comprehensive income. Thus, this shows that any gains or losses would be recognized in the comprehensive income from the net investment acting as hedge instrument.
References
Deloitte. (2009, April 16). IFRIC 16 — Hedges of a Net Investment in a Foreign Operation. Retrieved May 17, 2018, from IAS Plus: https://www.iasplus.com/en/standards/ifric/ifric16
Deloitte. (2017, May 3). IFRS 9 Financial Instruments. Retrieved May 17, 2018, from IAS Plus: https://www.iasplus.com/en/meeting-notes/ifrs-ic/2017/may/new-issue-on-ifrs-9
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