How does hedge accounting appear in group consolidation?
A core Group Accounting interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
IFRS 9 recognizes three hedge types, and consolidation must handle them consistently across the group. Fair-value hedges: both the hedging instrument and the hedged item's risk are remeasured through P&L (largely offsetting). Cash-flow hedges: the effective portion of the derivative's gain/loss is deferred in OCI (the cash-flow hedge reserve) and recycled to P&L when the hedged item affects earnings; this reserve carries forward in group equity. Net-investment hedges: used to hedge the FX exposure on a foreign operation's net assets — the effective portion goes to OCI alongside the translation reserve (CTA) and is recycled on disposal. Group-specific points: hedges of intragroup items generally don't qualify at the consolidated level (the exposure eliminates on consolidation) — only external exposures (or FX exposures on intragroup monetary items that aren't fully eliminated) can be hedged for group purposes; documentation and effectiveness must be maintained; and the OCI reserves must be tracked and recycled correctly. So consolidation preserves external hedge relationships, eliminates internal ones, and carries the hedge reserves in equity.
WHAT INTERVIEWERS LISTEN FOR
- ✓IFRS 9 three types: fair-value (P&L), cash-flow (OCI reserve, recycled), net-investment (OCI with CTA)
- ✓Intragroup hedges generally don't qualify at group level (exposure eliminates)
- ✓External exposures hedge-qualify; documentation/effectiveness required
- ✓Track OCI hedge reserves; recycle correctly (e.g., NIH on disposal)
COMMON MISTAKES
- ✗Keeping intragroup hedge effects at group level
- ✗Routing cash-flow hedge gains straight to P&L
- ✗Not recycling reserves correctly
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