Discontinuation of Hedge Accounting under Ind AS 109: When and What Next?

Hedge accounting is applied only while a designated relationship continues to meet the qualifying criteria and remains consistent with the entity's risk management objective. When those conditions cease, the accounting must change prospectively. Understanding when to discontinue a relationship is therefore just as important as documenting it at inception.

Ind AS 109 does not treat discontinuation as a convenient period-end election. The model is designed to follow actual risk management. If the relationship still meets the objective but only the hedge ratio needs adjustment, rebalancing may be the appropriate response. If the qualifying relationship has genuinely ended, discontinuation is required.

Events that can lead to discontinuation

Hedge accounting can cease when the hedging instrument expires, is sold, terminated or exercised; when the relationship no longer meets the qualifying criteria after taking account of any required rebalancing; or when the risk management objective for the designated relationship has changed so that the relationship no longer reflects how the entity manages the risk.

A derivative's rollover or replacement is not necessarily treated as an expiry or termination when the replacement is part of, and consistent with, the entity's documented risk management objective and the relevant requirements are met. The facts and documentation matter.

Similarly, a change in method or market conditions does not automatically require discontinuation. The entity first asks whether the relationship still has an economic relationship, whether credit risk dominates, and whether rebalancing can restore an appropriate hedge ratio.

Partial discontinuation is possible

Sometimes only part of a hedging relationship ceases to qualify. For example, the expected volume of a forecast transaction may decline from 100 units to 80 units while the remaining 80 units continue to meet the requirements and the risk management objective remains valid.

The entity may need to discontinue hedge accounting for the affected portion while continuing it for the remaining qualifying portion. Systems should therefore be capable of tracking designated quantities at a sufficiently granular level rather than treating every hedge as an all-or-nothing contract.

What happens after a fair value hedge is discontinued?

In a fair value hedge of an item measured at amortised cost, the hedged item's carrying amount may include a cumulative fair value hedge adjustment attributable to the hedged risk. When hedge accounting stops, that adjustment is not reversed immediately merely because the relationship ended.

Instead, the adjustment is generally amortised to profit or loss over the remaining life of the item using a recalculated effective interest rate, as applicable. Amortisation begins no later than when the item ceases to be adjusted for hedge gains and losses.

If the hedged item was an unrecognised firm commitment, the accounting outcome depends on whether and how that commitment subsequently results in recognition of an asset or liability. The relationship-level records must therefore continue even after the hedge designation has ended.

What happens after a cash flow hedge is discontinued?

For a cash flow hedge, the key question is what will happen to the hedged future cash flows.

If the future cash flows are still expected to occur, the amount already accumulated in the cash flow hedge reserve generally remains in equity until the future cash flows occur. At that point, it is accounted for in the same way that would have applied had the hedge relationship continued—for example through reclassification to profit or loss or a basis adjustment for a qualifying non-financial asset or liability.

If the hedged future cash flows are no longer expected to occur, the amount accumulated in the cash flow hedge reserve is generally reclassified immediately to profit or loss.

This is why the conclusion must distinguish carefully between "not highly probable" and "not expected." A transaction may cease to meet the highly probable threshold yet still be expected to occur. Hedge accounting may stop, but the existing reserve may remain until the transaction occurs or is no longer expected.

A simplified scenario

Assume an entity has a cash flow hedge of a forecast USD purchase expected in September. In July, a production delay makes September purchase timing no longer highly probable, but management has strong evidence that the purchase will still occur in November.

The entity assesses whether hedge accounting must be discontinued prospectively based on the changed facts. If the future cash flows are still expected, the qualifying amount already in the cash flow hedge reserve is not automatically released to profit or loss simply because the original relationship is discontinued. The reserve continues to be tracked until the transaction occurs or is no longer expected.

If the project is later cancelled and the purchase is no longer expected at all, the reserve treatment changes accordingly.

Do not use voluntary de-designation to manage earnings

A major principle of the Ind AS 109 model is alignment with risk management. An entity should not stop hedge accounting simply because the current accounting outcome is inconvenient while the documented risk management objective and qualifying relationship continue unchanged.

A discontinuation memo should answer six questions

State the effective date. Identify the triggering event. Explain whether rebalancing was considered and why it was or was not appropriate. Specify whether the discontinuation is full or partial. Quantify all accounting balances at the date of discontinuation. Finally, document the subsequent treatment of any fair value hedge adjustment, cash flow hedge reserve or cost-of-hedging reserve.

For forecast transactions, include a separate conclusion on whether the future cash flows remain expected and the evidence supporting that conclusion.

Closing the relationship without losing the audit trail

A hedge relationship may stop, but its accounting history often continues. Fair value adjustments may need amortisation. OCI balances may remain until future transactions occur. Net investment hedge amounts may remain until disposal of a foreign operation.

The best systems therefore change a relationship's status from active to discontinued without deleting its history. They preserve the designation, valuations, effectiveness tests, journal entries and reserve roll-forwards through final release.

Treating it that way helps ensure that the post-hedge accounting is as controlled and traceable as the original designation.