IFRIC 16 is effective
for the accounting periods beginning on or after October 1, 2008. Earlier
application of this standard is encouraged and permitted.
IFRIC 16 more
specifically applies to an entity that seeks the hedging of the foreign
currency risks in the net investments that exist in the foreign operations and
it wishes to obtain the benefits of the hedge accounting. To make it more
simple, this interpretation applies to an entity more likely to a parent
company and also to the financial statements in which the net investments of
the foreign operations are included as consolidated financial statements.
However, this applies to the joint ventures and associates too if they hold the
net investments of the foreign operations.
IFRIC 16 applies only
to the hedges of the net investments that arise in the case of foreign
operations, and it should not be applied to other types of hedge accounting in
common practice.
There may be the case
where Investments in foreign operations may be either directly held by a
parent company or by its other subsidiaries in the same group. IFRIC 16
addresses three main issues:
=> A parent company may choose as a hedged risk only those exchange differences which arise from a foreign operation using a different functional currency from its own. The presentation currency will not be affected by risks that may be hedged.
=> The hedging instrument
which is held as a hedge of a net investment in case of foreign operations may
be held by any entity or entities within the same group or different group.
=> IFRIC 16 requires that
IAS 21-The effects of changes in foreign exchange rates should be
applied to determine the amount which is reclassified to profit or loss in
respect of the hedged item and IFRS 9- Financial instruments must
be applied to determine the actual amount in respect of the instrument that is
hedged.