HK (IFRIC) Interpretation on Hedges of a Net Investment in a Foreign Operation 

In July 2008, the International Financial Reporting Interpretations Committee (IFRIC) also published IFRIC 16 "Hedges of a Net Investment in a Foreign Operation". The HKICPA issued the HKFRS equivalent in August 2008.

The IFRIC clarifies certain issues about the accounting for hedges of foreign currency risk relating to foreign operations (such as subsidiaries and associates whose activities are conducted in a currency other than the functional currency of the reporting entity).

The main issues addressed are:

	the type of risk that can qualify for this form of hedge accounting, and ¡@
	where within a group the instrument that offsets that risk may be held.

In respect of the first issue, IFRIC 16 concludes that translation risks relating to exchange differences between a foreign operation's functional currency and the reporting entity's presentation currency are not eligible for hedge accounting. This is based on the view that mere translation of currency for presentational use does not represent an economic risk. The economic risk relates to the functional currency exposure between the parent or investor and its foreign operation.

On the second issue, IFRIC clarifies that the hedging instrument can be held by any subsidiary or parent entity within a group regardless of the entity's functional currency.

IFRIC 16 is effective for annual periods commencing on or after 1 October 2008, with earlier application being permitted. However, in recognition of the difficulty that entities would face in preparing adequate information from the inception of the hedge relationship, retrospective application is not required. If an entity has designed a hedging instrument as a hedge of net investment but the hedge does not meet the conditions for hedge accounting in IFRIC 16, the entity applies IAS 39 "Financial Instruments: Recognition and Measurement" to discontinue that hedge accounting prospectively. In our view, this means the gain or loss on the hedging instrument relating to the effective portion of the hedge that has been recognised directly in equity will continue to be deferred until the foreign operation being hedged is disposed of.