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IFRIC 16 clarifies three main issues related to hedges of a net investment in a foreign operation:
- The presentation currency does not create a risk exposure to which an entity may apply hedge accounting. Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation.
- A hedging instrument in a hedge of a net investment in a foreign operation may be held by any entity within the group, not just the parent.
- An entity applies IFRS 9 to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument.
Standard history
In July 2008 the International Accounting Standards Board issued IFRIC 16 Hedges of a Net Investment in a Foreign Operation. It was developed by the Interpretations Committee.
Other Standards have made minor consequential amendments to IFRIC 16. They include IFRS 11 Joint Arrangements (issued May 2011), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013) and IFRS 9 Financial Instruments (issued July 2014).
