End of month 2 (28 February 20x1)
IE23. On 28 February 20x1 when Entity A next tests effectiveness, LIBOR is unchanged. Entity A does not revise its prepayment expectations. The fair value of the designated interest rate swap with a notional principal of CU8 million is (CU9,518)** (the swap is a liability). Also, Entity A calculates the fair value of the CU8 million of the hedged assets as at 28 February 20x1 is CU8,009,518††.
** CU23,795 [see paragraph IE8] × (CU8 million ) CU20 million)
†† CU20,023,795 [see paragraph IE7] × (CU8 million ) CU20 million)
IE24. Entity A makes the following accounting entries relating to the hedge in this time period:
Dr    Cash    CU71,707    
Cr    Income statement (interest income)         CU71,707
To recognise the interest received on the hedged amount (CU8 million).
Dr    Income statement (interest expense)    CU71,707    
Cr    Income statement (interest income)         CU62,115
Cr    Cash         CU9,592
To recognise the interest received and paid on the portion of the swap designated as the hedging instrument (CU8 million).
Dr    Derivative liability    CU9,445    
Cr    Income statement (gain)         CU9,445
To recognise the change in the fair value of the portion of the swap designated as the hedging instrument (CU8 million) (CU9,518 - CU18,963).
Dr    Income statement (loss)    CU9,445    
Cr    Separate balance sheet line item         CU9,445
To recognise the change in the fair value of the hedged amount (CU8,009,518-CU8,018,963).
IE25. The net effect on profit or loss (excluding interest income and interest expense) is nil reflecting that the hedge is fully effective.
IE26. Entity A makes the following accounting entry to amortise the line item balance for this time period:
Dr    Income statement (loss)    CU11,378    
Cr    Separate balance sheet line item         CU11,378*
To recognise the amortisation charge for the period.
* CU22,755 ÷ 2
End of month 3
IE27. During the third month there is no further change in the amount of assets or liabilities in the three-month time period. On 31 March 20x1 the assets and the swap mature and all balances are recognised in profit or loss.
IE28. Entity A makes the following accounting entries relating to this time period:
Dr    Cash    CU8,071,707    
Cr    Asset (balance sheet)         CU8,000,000
Cr    Income statement (interest income)         CU71,707
To recognise the interest and cash received on maturity of the hedged amount (CU8 million).
Dr    Income statement (interest expense)    CU71,707    
Cr    Income statement (interest income)         CU62,115
Cr    Cash         CU9,592
To recognise the interest received and paid on the portion of the swap designated as the hedging instrument (CU8 million).
Dr    Derivative liability    CU9,518    
Cr    Income statement (gain)         CU9,518
To recognise the expiry of the portion of the swap designated as the hedging instrument (CU8 million).
Dr    Income statement (loss)    CU9,518    
Cr    Separate balance sheet line item         CU9,518
To remove the remaining line item balance on expiry of the time period.
IE29. The net effect on profit or loss (excluding interest income and interest expense) is nil reflecting that the hedge is fully effective.
IE30. Entity A makes the following accounting entry to amortise the line item balance for this time period:
Dr    Income statement (loss)    CU11,377
Cr    Separate balance sheet line item    CU11,377*
To recognise the amortisation charge for the period.
* CU22,755 × 2
Summary
IE31. The tables below summarise:
(a) changes in the separate balance sheet line item;
(b) the fair value of the derivative;
(c) the profit or loss effect of the hedge for the entire three-month period of the hedge; and
(d) interest income and interest expense relating to the amount designated as hedged.
Description    1 Jan 20x1    31 Jan 20x1    1 Feb 20x1    28 Feb 20x1    31 Mar 20x1
     CU    CU    CU    CU    CU
Amount of asset hedged    20,000,000    19,200,000    8,000,000    8,000,000    8,000,000
(a) Changes in the separate balance sheet line item
Brought forward:                        
Balance to be amortised    Nil    Nil    Nil    22,755    11,377
Remaining balance    Nil    Nil    45,511    18,963    9,518
Less: Adjustment on sale of asset    Nil    Nil    (3,793)    Nil    Nil
Adjustment for change in fair value of the hedged asset    Nil    45,511    Nil    (9,445)    (9,518)
Amortisation    Nil    Nil    Nil    (11,378)    (11,377)
Carried forward:                        
Balance to be amortised    Nil    Nil    22,755    11,377    Nil
Remaining balance    Nil    45,511    18,963    9,518    Nil
(b) The fair value of the derivative
     1 Jan 20x1    31 Jan 20x1    1 Feb 20x1    28 Feb 20x1    31 Mar 20x1
CU20,000,000    Nil    47,408    -    -    -
CU12,000,000    Nil    -    28,445    No longer designated as the hedging instrument.
CU8,000,000    Nil    -    18,963    9,518    Nil
Total    Nil    47,408    47,408    9,518    Nil
(c) Profit or loss effect of the hedge
     1 Jan 20x1    31 Jan 20x1    1 Feb 20x1    28 Feb 20x1    31 Mar 20x1
Change in line item: asset    Nil    45,511    N/A    (9,445)    (9,518)
Change in derivative fair value    Nil    (47,408)    N/A    9,445    9,518
Net effect    Nil    (1,897)    N/A    Nil    Nil
Amortisation    Nil    Nil    N/A    (11,378)    (11,377)
In addition, there is a gain on sale of assets of CU14,607 at 1 February 20x1.
(d) Interest income and interest expense relating to the amount designated as hedged
Profit or loss recognised for the amount hedged    1 Jan 20x1    31 Jan 20x1    1 Feb 20x1    28 Feb 20x1    31 Mar 20x1
Interest income                        
- on the asset    Nil    172,097    N/A    71,707    71,707
- on the swap    Nil    179,268    N/A    62,115    62,115
Interest expense                    
- on the swap    Nil    (179,268)    N/A    (71,707)    (71,707)

Beginning of month 2
IE16. On 1 February 20x1 Entity A sells a proportion of the assets in the various time periods. Entity A calculates that it has sold 8 per cent of the entire portfolio of assets. Because the assets were allocated into time periods by allocating a percentage of the assets (rather than individual assets) into each time period, Entity A determines that it cannot ascertain into which specific time periods the sold assets were scheduled. Hence it uses a systematic and rational basis of allocation. Based on the fact that it sold a representative selection of the assets in the portfolio, Entity A allocates the sale proportionately over all time periods.
IE17. On this basis, Entity A computes that it has sold 8 per cent of the assets allocated to the three-month time period, ie CU8 million (8 per cent of CU96 million). The proceeds received are CU8,018,400, equal to the fair value of the assets.* On derecognition of the assets, Entity A also removes from the separate balance sheet line item an amount that represents the change in the fair value of the hedged assets that it has now sold. This is 8 per cent of the total line item balance of CU45,511, ie CU3,793.
* The amount realised on sale of the asset is the fair value of a prepayable asset, which is less than the fair value of the equivalent non-prepayable asset shown in paragraph IE7.
IE18. Entity A makes the following accounting entries to recognise the sale of the asset and the removal of part of the balance in the separate balance sheet line item.
Dr    Cash    CU8,018,400    
Cr    Asset         CU8,000,000
Cr    Separate balance sheet line item         CU3,793
Cr    Income statement (gain)         CU14,607
To recognise the sale of the asset at fair value and to recognise a gain on sale.
Because the change in the amount of the assets is not attributable to a change in the hedged interest rate no ineffectiveness arises.
IE19. Entity A now has CU88 million of assets and CU80 million of liabilities in this time period. Hence the net amount Entity A wants to hedge is now CU8 million and, accordingly, it designates CU8 million as the hedged amount.
IE20. Entity A decides to adjust the hedging instrument by designating only a proportion of the original swap as the hedging instrument. Accordingly, it designates as the hedging instrument CU8 million or 40 per cent of the notional amount of the original swap with a remaining life of two months and a fair value of CU18,963.† It also complies with the other designation requirements in paragraphs 88(a) and AG119 of the Standard. The CU12 million of the notional amount of the swap that is no longer designated as the hedging instrument is either classified as held for trading with changes in fair value recognised in profit or loss, or is designated as the hedging instrument in a different hedge.*
† CU47,408 × 40 per cent

* The entity could instead enter into an offsetting swap with a notional principal of CU12 million to adjust its position and designate as the hedging instrument all CU20 million of the existing swap and all CU12 million of the new offsetting swap.
IE21. As at 1 February 20x1 and after accounting for the sale of assets, the separate balance sheet line item is CU41,718 (CU45,511 – CU3,793), which represents the cumulative change in fair value of CU17.6† million of assets. However, as at 1 February 20x1, Entity A is hedging only CU8 million of assets that have a cumulative change in fair value of CU18,963.§ The remaining separate balance sheet line item of CU22,755‡ relates to an amount of assets that Entity A still holds but is no longer hedging. Accordingly Entity A amortises this amount over the remaining life of the time period, ie it amortises CU22,755 over two months.
† CU19.2 million-(8 % • CU19.2 million)
§ CU41,718 • (CU8 million ) CU17.6 million)
‡ CU41,718 – CU18,963
IE22. Entity A determines that it is not practicable to use a method of amortisation based on a recalculated effective yield and hence uses a straight-line method.

IE9. On 1 January 20x1, Entity A designates as the hedged item an amount of CU20 million of assets in the three-month time period. It designates as the hedged risk the change in the value of the hedged item (ie the CU20 million of assets) that is attributable to changes in LIBOR. It also complies with the other designation requirements set out in paragraphs 88(d) and AG119 of the Standard.
IE10. Entity A designates as the hedging instrument the interest rate swap described in paragraph IE4.
End of month 1 (31 January 20x1)
IE11. On 31 January 20x1 (at the end of month 1) when Entity A tests effectiveness, LIBOR has decreased. Based on historical prepayment experience, Entity A estimates that, as a consequence, prepayments will occur faster than previously estimated. As a result it re-estimates the amount of assets scheduled into this time period (excluding new assets originated during the month) as CU96 million.
IE12. The fair value of the designated interest rate swap with a notional principal of CU20 million is (CU47,408)* (the swap is a liability).
IE13. Entity A computes the change in the fair value of the hedged item, taking into account the change in estimated prepayments, as follows.
(a) First, it calculates the percentage of the initial estimate of the assets in the time period that was hedged. This is 20 per cent (CU20,000 ) CU100,000).
(b) Second, it applies this percentage (20 per cent) to its revised estimate of the amount in that time period (CU96 million) to calculate the amount that is the hedged item based on its revised estimate. This is CU19.2 million.
(c) Third, it calculates the change in the fair value of this revised estimate of the hedged item (CU19.2 million) that is attributable to changes in LIBOR. This is CU45,511 (CU47,408† × (CU19.2 million ÷ CU20 million))
* See paragraph IE8

† ie CU20,047,408 – CU20,000,000. See paragraph IE7.
IE14. Entity A makes the following accounting entries relating to this time period:
Dr    Cash    CU172,097    
Cr    Income statement (interest income)*         CU172,097
To recognise the interest received on the hedged amount (CU19.2 million).
Dr    Income statement (interest expense)    CU179,268    
Cr    Income statement (interest income)         CU179,268
Cr    Cash         Nil
To recognise the interest received and paid on the swap designated as the hedging instrument.
Dr    Income statement (loss)    CU47,408    
Cr    Derivative liability         CU47,408
To recognise the change in the fair value of the swap.
Dr    Separate balance sheet line item    CU45,511    
Cr    Income statement (gain)         CU45,511
To recognise the change in the fair value of the hedged amount.
* This Example does not show how amounts of interest income and interest expense are calculated.
IE15. The net result on profit or loss (excluding interest income and interest expense) is to recognise a loss of (CU1,897). This represents ineffectiveness in the hedging relationship that arises from the change in estimated prepayment dates.

Facts
IE1. On 1 January 20x1, Entity A identifies a portfolio comprising assets and liabilities whose interest rate risk it wishes to hedge. The liabilities include demandable deposit liabilities that the depositor may withdraw at any time without notice. For risk management purposes, the entity views all of the items in the portfolio as fixed rate items.
IE2. For risk management purposes, Entity A analyses the assets and liabilities in the portfolio into repricing time periods based on expected repricing dates. The entity uses monthly time periods and schedules items for the next five years (ie it has 60 separate monthly time periods).* The assets in the portfolio are prepayable assets that Entity A allocates into time periods based on the expected prepayment dates, by allocating a percentage of all of the assets, rather than individual items, into each time period. The portfolio also includes demandable liabilities that the entity expects, on a portfolio basis, to repay between one month and five years and, for risk management purposes, are scheduled into time periods on this basis. On the basis of this analysis, Entity A decides what amount it wishes to hedge in each time period.
IE3. This example deals only with the repricing time period expiring in three months' time, ie the time period maturing on 31 March 20x1 (a similar procedure would be applied for each of the other 59 time periods). Entity A has scheduled assets of CU100 million and liabilities of CU80 million into this time period. All of the liabilities are repayable on demand.
* In this Example principal cash flows have been scheduled into time periods but the related interest cash flows have been included when calculating the change in the fair value of the hedged item. Other methods of scheduling assets and liabilities are also possible. Also, in this Example, monthly repricing time periods have been used. An entity may choose narrower or wider time periods.
IE4. Entity A decides, for risk management purposes, to hedge the net position of CU20 million and accordingly enters into an interest rate swap* on 1 January 20x1 to pay a fixed rate and receive LIBOR, with a notional principal amount of CU20 million and a fixed life of three months.
IE5. This Example makes the following simplifying assumptions:
(a) the coupon on the fixed leg of the swap is equal to the fixed coupon on the asset;
(b) the coupon on the fixed leg of the swap becomes payable on the same dates as the interest payments on the asset; and
(c) the interest on the variable leg of the swap is the overnight LIBOR rate. As a result, the entire fair value change of the swap arises from the fixed leg only, because the variable leg is not exposed to changes in fair value due to changes in interest rates.
In cases when these simplifying assumptions do not hold, greater ineffectiveness will arise. (The ineffectiveness arising from (a) could be eliminated by designating as the hedged item a portion of the cash flows on the asset that are equivalent to the fixed leg of the swap.)
IE6. It is also assumed that Entity A tests effectiveness on a monthly basis.
IE7. The fair value of an equivalent non-prepayable asset of CU20 million, ignoring changes in value that are not attributable to interest rate movements, at various times during the period of the hedge is as follows.
     1 Jan 20x1    31 Jan 20x1    1 Feb 20x1    28 Feb 20x1    31 Mar 20x1
Fair value (asset) (CU)    20,000,000    20,047,408    20,047,408    20,023,795    Nil
IE8. The fair value of the swap at various times during the period of the hedge is as follows.
     1 Jan 20x1    31 Jan 20x1    1 Feb 20x1    28 Feb 20x1    31 Mar 20x1
Fair value (liability) (CU)    Nil    (47,408)    (47,408)    (23,795)    Nil
* The Example uses a swap as the hedging instrument. An entity may use forward rate agreements or other derivatives as hedging instruments.

BC220. The Board also considered whether to permit retrospective designation of a portfolio hedge. The Board noted that this would conflict with the principle in paragraph 88(a) that "at the inception of the hedge there is formal designation and documentation of the hedging relationship" and accordingly, decided not to permit retrospective designation.
Guidance on Implementing IAS 39
In the Guidance on Implementing IAS 39, the following paragraph is added to the end of the answer to Question E.4.4 Assessment of impairment: fair value hedge.
When a loan is included in a portfolio hedge of interest rate risk, the entity should allocate the change in the fair value of the hedged portfolio to the loans (or groups of similar loans) being assessed for impairment on a systematic and rational basis.
In the Guidance on Implementing IAS 39, the first paragraph of the answer to Question F.4.4 Hedge effectiveness: effectiveness tests is amended as follows (new text is underlined and deleted text is struck through).
IAS 39 does not provide specific guidance about how effectiveness tests are performed. IAS 39.AG105 specifies that a hedge is normally regarded as highly effective only if, (a) at inception and throughout the life of the hedge the entity can expect that changes in the fair value or cash flows of the hedging instrument and the hedged item will "almost fully offset". In addition, IAS 39.AG105 requires that in subsequent periods, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated, and (b) the actual results are within a range of 80-125 per cent. IAS 39.AG105 also states that the expectation in (a) can be demonstrated in various ways.
In the Guidance on Implementing IAS 39, Question and Answer F.4.6 Hedge effectiveness: underhedging is deleted. The reference to F.4.6 in the Table of Concordance is replaced with IAS 39.AG107A.
In the Guidance on Implementing IAS 39, in the sixth paragraph of the answer to Question F.6.2 Hedge accounting considerations when interest rate risk is managed on a net basis, issue (b) is amended as follows (new text is underlined and deleted text is struck through).
In economic terms, a forward derivative instrument could be used to hedge assets that are subject to prepayment but it would be effective only for small movements in interest rates. A reasonable estimate of prepayments can be made for a given interest rate environment and the derivative position can be adjusted as the interest rate environment changes. If an entity's risk management strategy is to adjust the amount of the hedging instrument periodically to reflect changes in the hedged position, the entity needs to demonstrate that the hedge is expected to be highly effective only for the period until the amount of the hedging instrument is next adjusted. However, for that period accounting purposes, the expectation of effectiveness has to be based on existing fair value exposures and the potential for interest rate movements without consideration of future adjustments to those positions. Furthermore, the The fair value exposure attributable to prepayment risk can generally be hedged with options.

Illustrative Example
The following Illustrative Example is added to IAS 39.
This example accompanies, but is not part of, the Standard.

BC217. Some respondents to the Exposure Draft sought guidance on how the effectiveness tests are to be applied to a portfolio hedge. In particular, they asked how the prospective effectiveness test is to be applied when an entity periodically 'rebalances' a hedge (ie adjusts the amount of the hedging instrument to reflect changes in the hedged item). The Board decided that if the entity's risk management strategy is to change the amount of the hedging instrument periodically to reflect changes in the hedged position, that strategy affects the determination of the term of the hedge. Thus, the entity needs to demonstrate that the hedge is expected to be highly effective only for the period until the amount of the hedging instrument is next adjusted. The Board noted that this decision does not conflict with the requirement in paragraph 75 that "a hedging relationship may not be designated for only a portion of the time period during which a hedging instrument remains outstanding". This is because the entire hedging instrument is designated (and not only some of its cash flows, for example, those to the time when the hedge is next adjusted). However, expected effectiveness is assessed by considering the change in the fair value of the entire hedging instrument only for the period until it is next adjusted.
BC218. A third issue raised in the comment letters was whether, for a portfolio hedge, the retrospective effectiveness test should be assessed for all time buckets in aggregate or individually for each time bucket. The Board decided that entities could use any method to assess retrospective effectiveness, but noted that the chosen method would form part of the documentation of the hedging relationship made at the inception of the hedge in accordance with paragraph 88(a) and hence could not be decided at the time the retrospective effectiveness test is performed.
Transition to fair value hedge accounting for portfolios of interest rate risk
BC219. In finalising the amendments to IAS 39, the Board considered whether to provide additional guidance for entities wishing to apply fair value hedge accounting to a portfolio hedge that had previously been accounted for using cash flow hedge accounting. The Board noted that such entities could apply paragraph 101(d) to revoke the designation of a cash flow hedge and re-designate a new fair value hedge using the same hedged item and hedging instrument, and decided to clarify this in the Application Guidance. Additionally, the Board concluded that clarification was not required for first-time adopters because IFRS 1 already contained sufficient guidance.

BC212. The Board also noted that if the designated hedged amount for a repricing time period is reduced, IAS 39* requires that the separate balance sheet line item described in paragraph 89A relating to that reduction is amortised on the basis of a recalculated effective interest rate. The Board noted that for a portfolio hedge of interest rate risk, amortisation based on a recalculated effective interest rate could be complex to determine and could demand significant additional systems requirements. Consequently, the Board decided that in the case of a portfolio hedge of interest rate risk (and only in such a hedge), the line item balance may be amortised using a straight-line method when a method based on a recalculated effective interest rate is not practicable.
* see paragraph 92
The hedging instrument
BC213. The Board was asked by commentators to clarify whether the hedging instrument may be a portfolio of derivatives containing offsetting risk positions. Commentators noted that previous versions of IAS 39 were unclear on this point.
BC214. The issue arises because the assets and liabilities in each repricing time period change over time as prepayment expectations change, as items are derecognised and as new items are originated. Thus the net position, and the amount the entity wishes to designate as the hedged item, also changes over time. If the hedged item decreases, the hedging instrument needs to be reduced. However, entities do not normally reduce the hedging instrument by disposing of some of the derivatives contained in it. Instead, entities adjust the hedging instrument by entering into new derivatives with an offsetting risk profile.
BC215. The Board decided to permit the hedging instrument to be a portfolio of derivatives containing offsetting risk positions for both individual and portfolio hedges. It noted that all of the derivatives concerned are measured at fair value. It also noted that the two ways of adjusting the hedging instrument described in the previous paragraph can achieve substantially the same effect. Therefore the Board clarified paragraph 77 to this effect.
Hedge effectiveness for a portfolio hedge of interest rate risk
BC216. Some respondents to the Exposure Draft questioned whether IAS 39's effectiveness tests* should apply to a portfolio hedge of interest rate risk. The Board noted that its objective in amending IAS 39 for a portfolio hedge of interest rate risk is to permit fair value hedge accounting to be used more easily, whilst continuing to meet the principles of hedge accounting. One of these principles is that the hedge is highly effective. Thus, the Board concluded that the effectiveness requirements in IAS 39 apply equally to a portfolio hedge of interest rate risk.
* see paragraph AG105

BC208. Accordingly, the Board decided that two line items should be presented, as follows:
(a) for those repricing time periods for which the hedged item is an asset, the change in its fair value is presented in a single separate line item within assets; and
(b) for those repricing time periods for which the hedged item is a liability, the change in its fair value is presented in a single separate line item within liabilities.
BC209. The Board noted that these line items represent changes in the fair value of the hedged item. For this reason, the Board decided that they should be presented next to financial assets or financial liabilities.
Derecognition of amounts included in the separate line items
Derecognition of an asset (or liability) in the hedged portfolio
BC210. The Board discussed how and when amounts recognised in the separate balance sheet line items should be removed from the balance sheet. The Board noted that the objective is to remove such amounts from the balance sheet in the same periods as they would have been removed had individual assets or liabilities (rather than an amount) been designated as the hedged item.
BC211. The Board noted that this objective could be fully met only if the entity schedules individual assets or liabilities into repricing time periods and tracks both for how long the scheduled individual items have been hedged and how much of each item was hedged in each time period. In the absence of such scheduling and tracking, some assumptions would need to be made about these matters and, hence, about how much should be removed from the separate balance sheet line items when an asset (or liability) in the hedged portfolio is derecognised. In addition, some safeguards would be needed to ensure that amounts included in the separate balance sheet line items are removed from the balance sheet over a reasonable period and do not remain in the balance sheet indefinitely. With these points in mind, the Board decided to require that:
(a) whenever an asset (or liability) in the hedged portfolio is derecognised-whether through earlier than expected prepayment, sale or write-off from impairment-any amount included in the separate balance sheet line item relating to that derecognised asset (or liability) should be removed from the balance sheet and included in the gain or loss on derecognition.
(b) if an entity cannot determine into which time period(s) a derecognised asset (or liability) was scheduled:
(i) it should assume that higher than expected prepayments occur on assets scheduled into the first available time period; and
(ii) it should allocate sales and impairments to assets scheduled into all time periods containing the derecognised item on a systematic and rational basis.
(c) the entity should track how much of the total amount included in the separate line items relates to each repricing time period, and should remove the amount that relates to a particular time period from the balance sheet no later than when that time period expires.
Amortisation

BC205. Finally, the Board was informed that, to be practicable in terms of systems needs, any approach should not require tracking of the amount in a repricing time period for multiple periods. Therefore it decided that ineffectiveness should be calculated by determining the change in the estimated amount in a repricing time period between one date on which effectiveness is measured and the next, as described more fully in paragraphs AG126 and AG127. This requires the entity to track how much of the change in each repricing time period between these two dates is attributable to revisions in estimates and how much is attributable to the origination of new assets (or liabilities). However, once ineffectiveness has been determined as set out above, the entity in essence starts again, ie it establishes the new amount in each repricing time period (including new items that have been originated since it last tested effectiveness), designates a new hedged item, and repeats the procedures to determine ineffectiveness at the next date it tests effectiveness. Thus the tracking is limited to movements between one date when effectiveness is measured and the next. It is not necessary to track for multiple periods. However, the entity will need to keep records relating to each repricing time period (a) to reconcile the amounts for each repricing time period with the total amounts in the two separate line items in the balance sheet (see paragraph AG114(f)), and (b) to ensure that amounts in the two separate line items are derecognised no later than when the repricing time period to which they relate expires.
BC206. The Board also noted that the amount of tracking required by the percentage approach is no more than what would be required by any of the layer approaches. Thus, the Board concluded that none of the approaches was clearly preferable from the standpoint of systems needs.
The carrying amount of the hedged item
BC207. The last issue noted in paragraph BC176 is how to present in the balance sheet the change in fair value of the hedged item. The Board noted the concern of respondents that the hedged item may contain many-even thousands of-individual assets (or liabilities) and that to change the carrying amounts of each of these individual items would be impracticable. The Board considered dealing with this concern by permitting the change in value to be presented in a single line item in the balance sheet. However, the Board noted that this could result in a decrease in the fair value of a financial asset (financial liability) being recognised as a financial liability (financial asset). Furthermore, for some repricing time periods the hedged item may be an asset, whereas for others it may be a liability. The Board concluded that it would be incorrect to present together the changes in fair value for such repricing time periods, because to do so would combine changes in the fair value of assets with changes in the fair value of liabilities.

BC203. The Board also considered comments on the Exposure Draft that:
(a) some entities hedge prepayment risk and interest rate risk separately, by hedging to the expected prepayment date using interest rate swaps, and hedging possible variations in these expected prepayment dates using swaptions.
(b) the embedded derivatives provisions of IAS 39 require some prepayable assets to be separated into a prepayment option and a non-prepayable host contract* (unless the entity is unable to measure separately the prepayment option, in which case it treats the entire asset as held for trading*). This seems to conflict with the view in the Exposure Draft that the two risks are too difficult to separate for the purposes of a portfolio hedge.
* see IAS 39, paragraphs 11 and AG30(g)

* see IAS 39, paragraph 12
BC204. In considering these arguments, the Board noted that the percentage approach described in paragraph AG126(b) is a proxy for measuring the change in the fair value of the entire asset (or liability)-including any embedded prepayment option-that is attributable to changes in interest rates. The Board had developed this proxy in the Exposure Draft because it had been informed that most entities (a) do not separate interest rate risk and prepayment risk for risk management purposes and hence (b) were unable to value the change in the value of the entire asset (including any embedded prepayment option) that is attributable to changes in the hedged interest rates. However, the comments described in BC203 indicated that in some cases, entities may be able to measure this change in value directly. The Board noted that such a direct method of measurement is conceptually preferable to the proxy described in paragraph AG126(b) and, accordingly, decided to recognise it explicitly. Thus, for example, if an entity that hedges prepayable assets using a combination of interest rate swaps and swaptions is able to measure directly the change in fair value of the entire asset, it could measure effectiveness by comparing the change in the value of the swaps and swaptions with the change in the fair value of the entire asset (including the change in the value of the prepayment option embedded in them) that is attributable to changes in the hedged interest rate. However, the Board also decided to permit the proxy proposed in the Exposure Draft for those entities that are unable to measure directly the change in the fair value of the entire asset.
Consideration of systems requirements