What is Fair Value Hedge?
A fair value hedge is a hedge of the exposure to changes in the fair value of a recognized asset, liability or unrecognized firm commitment that could affect profit or loss. Under IFRS 9, both the hedging instrument and the hedged item are remeasured to fair value, with changes recognized in profit or loss.
How It Works
- Document the hedged item, hedging instrument and risk hedged.
- Remeasure the hedging instrument to fair value through profit or loss.
- Adjust the carrying amount of the hedged item for fair value changes attributable to the hedged risk, also through profit or loss.
- Discontinue hedge accounting if effectiveness fails.
Saudi Context
Saudi banks hedging fixed-rate sukuk holdings against interest rate risk often designate the relationships as fair value hedges, allowing the sukuk carrying amount to be adjusted alongside the swap.
Example
A bank holds SAR 100 million of fixed-rate sukuk and enters an interest rate swap. Both legs are remeasured to fair value through P&L, with the changes largely offsetting.