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.

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.

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)

Appendix Amendments to IAS 32
The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2005. If an entity applies this Standard for an earlier period, these amendments shall be applied for that earlier period.
A1. IAS 32 Financial Instruments: Disclosure and Presentation is amended as described below.
Paragraph IN21 is deleted.
Paragraph 96 is amended to read as follows (new text is underlined).
96. An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier application is permitted. An entity shall not apply this Standard for annual periods beginning before 1 January 2005 unless it also applies IAS 39 (as revised in 2003), including the amendments issued in March 2004. If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact.
Approval of Amendments to IAS 39 by the Board
These Amendments to International Accounting Standard 39 Financial Instruments: Recognition and Measurement Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk were approved for issue by thirteen of the fourteen members of the International Accounting Standards Board. Mr Smith dissented. His dissenting opinion is set out on the following page.
Sir David Tweedie Chairman Thomas E Jones Vice-Chairman Mary E Barth Hans-Georg Bruns Anthony T Cope Robert P Garnett Gilbert Gélard James J Leisenring Warren J McGregor Patricia L O'Malley Harry K Schmid John T Smith Geoffrey Whittington Tatsumi Yamada
Dissenting Opinion
Dissent of John T Smith
DO1. Mr Smith dissents from these Amendments to IAS 39 Financial Instruments: Recognition and Measurement Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk. He agrees with the objective of finding a macro hedging solution that would reduce systems demands without undermining the fundamental accounting principles related to derivative instruments and hedging activities. However, Mr Smith believes that some respondents' support for these Amendments and their willingness to accept IAS 39 is based more on the extent to which the Amendments reduce recognition of ineffectiveness, volatility of profit or loss, and volatility of equity than on whether the Amendments reduce systems demands without undermining the fundamental accounting principles.
DO2. Mr Smith believes some decisions made during the Board's deliberations result in an approach to hedge accounting for a portfolio hedge that does not capture what was originally intended, namely a result that is substantially equivalent to designating an individual asset or liability as the hedged item. He understands some respondents will not accept IAS 39 unless the Board provides still another alternative that will further reduce reported volatility. Mr Smith believes that the Amendments already go beyond their intended objective. In particular, he believes that features of these Amendments can be applied to smooth out ineffectiveness and achieve results substantially equivalent to the other methods of measuring ineffectiveness that the Board considered when developing the Exposure Draft. The Board rejected those methods because they did not require the immediate recognition of all ineffectiveness. He also believes those features could be used to manage earnings.

Amendments to International Accounting Standard 39 Financial Instruments: Recognition and Measurement Transition and Initial Recognition of Financial Assets and Financial Liabilities
December 2004
Contents
Amendments to IAS 39
Effective Date and Transition
Application Guidance
Basis for Conclusions
Appendix: Amendments To IFRS 1
Approval Of Amendments To IAS 39 By The Board
These Amendments to IAS 39 Financial Instruments: Recognition and Measurement-Transition and Initial Recognition of Financial Assets and Financial Liabilities are issued by the International Accounting Standards Board (IASB), 30 Cannon Street, London EC4M 6XH, United Kingdom.
Tel: +44 (0)20 7246 6410
Fax: +44 (0)20 7246 6411
Email: iasb@iasb.org
Web: www.iasb.org
The IASB, the International Accounting Standards Committee Foundation (IASCF), the authors and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise.
Copyright © 2004 IASCF
All rights reserved. No part of this publication may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without prior permission in writing from the IASCF.
Amendments to IAS 39 Financial Instruments: Recognition and Measurement
This document sets out amendments to IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) as amended up to 31 March 2004. The amendments finalise proposals that were contained in an Exposure Draft of Proposed Amendments to IAS 39 - Transition and Initial Recognition of Financial Assets and Financial Liabilities published in July 2004. The Appendix sets out amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards.
Entities shall apply the amendments set out in this document for annual periods beginning on or after 1 January 2005. An entity shall apply the amendments to an earlier period when it applies IAS 39 and IAS 32 Financial Instruments: Disclosure and Presentation (both as amended up to 31 March 2004) to that period.
In the Standard, paragraph 107A is added.
Effective Date and Transition
107A. Notwithstanding paragraph 104, an entity may apply the requirements in the last sentence of paragraph AG76, and paragraph AG76A, in either of the following ways:
(a) prospectively to transactions entered into after 25 October 2002; or
(b) prospectively to transactions entered into after 1 January 2004.
In Appendix A, Application Guidance, paragraph AG76A is added.
Application Guidance
Measurement (paragraphs 43-70)
No Active Market: Valuation Technique
AG76A.The subsequent measurement of the financial asset or financial liability and the subsequent recognition of gains and losses shall be consistent with the requirements of this Standard. The application of paragraph AG76 may result in no gain or loss being recognised on the initial recognition of a financial asset or financial liability. In such a case, IAS 39 requires that a gain or loss shall be recognised after initial recognition only to the extent that it arises from a change in a factor (including time) that market participants would consider in setting a price.

Basis for Conclusions
In the Basis for Conclusions on IAS 39, paragraph BC222(u) is added.
BC222. The main changes from the Exposure Draft's proposals are as follows:
(u) The Exposure Draft proposed, and the revised Standard originally required, retrospective application of the 'day 1' gain or loss recognition requirements in paragraph AG76. After the revised Standard was issued, constituents raised concerns that retrospective application would diverge from the requirements of US GAAP, would be difficult and expensive to implement, and might require subjective assumptions about what was observable and what was not. In response to these concerns, the Board decided:
(i) to permit entities to apply the requirements in the last sentence of paragraph AG76 in any one of the following ways:
•    retrospectively, as previously required by IAS 39
•    prospectively to transactions entered into after 25 October 2002, the effective date of equivalent US GAAP requirements
•    prospectively to transactions entered into after 1 January 2004, the date of transition to IFRSs for many entities.
(ii) to clarify that a gain or loss should be recognised after initial recognition only to the extent that it arises from a change in a factor (including time) that market participants would consider in setting a price. Some constituents asked the Board to clarify that straight-line amortisation is an appropriate method of recognising the difference between a transaction price (used as fair value in accordance with paragraph AG76) and a valuation made at the time of the transaction that was not based solely on data from observable markets. The Board decided not to do this. It concluded that although straight-line amortisation may be an appropriate method in some cases, it will not be appropriate in others.

Appendix Amendments to IFRS 1
The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2005. If an entity applies IFRS 1 for an earlier period, these amendments shall be applied for that earlier period.
A1 IFRS 1 First-time Adoption of International Financial Reporting Standards is amended as described below.
In paragraph 13, subparagraphs (j) and (k) are amended, and subparagraph (l) inserted, as follows (new text is underlined and deleted text is struck through):
(j) decommissioning liabilities included in the cost of property, plant and equipment (paragraph 25E); and
(k) leases (paragraph 25F).; and
(l) fair value measurement of financial assets or financial liabilities at initial recognition (paragraph 25G).
After paragraph 25F a new heading and paragraph 25G are inserted as follows:
Fair value measurement of financial assets or financial liabilities
25G Notwithstanding the requirements of paragraphs 7 and 9, an entity may apply the requirements in the last sentence of IAS 39 paragraph AG76, and paragraph AG76A, in either of the following ways:
(a) prospectively to transactions entered into after 25 October 2002; or
(b) prospectively to transactions entered into after 1 January 2004.
In the Basis for Conclusions, paragraph BC74 is amended as follows (new text is underlined and deleted text is struck through):
BC74 The Board reconsidered practical implementation difficulties that could arise from the retrospective application of two aspects of IAS 39 Financial Instruments: Recognition and Measurement:
(a) hedge accounting (paragraphs BC75-BC80); and
(b) the treatment of cumulative fair value changes on available-for-sale financial assets at the date of transition to IFRSs (paragraphs BC81-BC83).; and
(c) 'day 1' gain or loss recognition (paragraph BC83A).
Paragraph BC83A is added as follows:
BC83A IFRS 1 originally required retrospective application of the 'day 1' gain or loss recognition requirements in IAS 39, paragraph AG76. After the revised IAS 39 was issued, constituents raised concerns that retrospective application would diverge from the requirements of US GAAP, would be difficult and expensive to implement, and might require subjective assumptions about what was observable and what was not. In response to these concerns, the Board decided to permit entities to apply the requirements in the last sentence of IAS 39 paragraph AG76, and paragraph AG76A, in any one of the following ways:
(a) retrospectively;
(b) prospectively to transactions entered into after 25 October 2002; or
(c) prospectively to transactions entered into after 1 January 2004.

Approval of Amendments to IAS 39 by the Board
These Amendments to International Accounting Standard 39 Financial Instruments: Recognition and Measurement-Transition and Initial Recognition of Financial Assets and Financial Liabilities were approved for issue by the fourteen members of the International Accounting Standards Board.
Sir David Tweedie    Chairman
Thomas E Jones    Vice-Chairman
Mary E Barth    
Hans-Georg Bruns    
Anthony T Cope    
Jan Engström    
Robert P Garnett    
Gilbert Gélard    
James J Leisenring    
Warren J McGregor    
Patricia L O'Malley    
John T Smith    
Geoffrey Whittington    
Tatsumi Yamada    



Amendment To International Accounting Standard IAS 39 Financial Instruments: Recognition and Measurement - Cash Flow Hedge Accounting of Forecast Intragroup Transactions
Contents
Amendments To IAS 39
Hedged Items
Effective Date and Transition
Application Guidance
Basis for Conclusions
Approval Of Amendments To IAS 39 By The Board
These Amendments to IAS 39 Financial Instruments: Recognition and Measurement - Cash Flow Hedge Accounting of Forecast Intragroup Transactions are issued by the International Accounting Standards Board (IASB), 30 Cannon Street, London EC4M 6XH, United Kingdom.
Tel: +44 (0)20 7246 6410 Fax: +44 (0)20 7246 6411 Email: iasb@iasb.org Web: www.iasb.org
The IASB, the International Accounting Standards Committee Foundation (IASCF), the authors and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise.
ISBN: 1-904230-80-6
Copyright © 2005 IASCF®
International Financial Reporting Standards (including International Accounting Standards and SIC and IFRIC Interpretations), Exposure Drafts, and other IASB publications are copyright of the IASCF. The approved text of International Financial Reporting Standards and other IASB publications is that published by the IASB in the English language. Copies may be obtained from the IASCF. Please address publications and copyright matters to:
IASCF Publications Department, 1st Floor, 30 Cannon Street, London EC4M 6XH, United Kingdom. Tel: +44 (0)20 7332 2730 Fax: +44 (0)20 7332 2749 Email: publications@iasb.org Web: www.iasb.org
All rights reserved. No part of this publication may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without prior permission in writing from the IASCF.
International Accounting Standards Board
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Amendments to IAS 39 Financial Instruments: Recognition and Measurement
This document sets out amendments to IAS 39 Financial Instruments: Recognition and Measurement (IAS 39). The amendments relate to proposals that were contained in an Exposure Draft of Proposed Amendments to IAS 39 - Cash Flow Hedge Accounting of Forecast Intragroup Transactions published in July 2004.
Entities shall apply the amendments set out in this document for annual periods beginning on or after 1 January 2006.
In the Standard paragraph 80 is amended (new text is underlined and deleted text is struck through) and paragraphs 108A and 108B are added.

Hedged Items
Qualifying Items
...
80. For hedge accounting purposes, only assets, liabilities, firm commitments or highly probable forecast transactions that involve a party external to the entity can be designated as hedged items. It follows that hedge accounting can be applied to transactions between entities or segments in the same group only in the individual or separate financial statements of those entities or segments and not in the consolidated financial statements of the group. As an exception, the foreign currency risk of an intragroup monetary item (eg a payable/receivable between two subsidiaries) may qualify as a hedged item in the consolidated financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully eliminated on consolidation under in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates. Under In accordance with IAS 21, foreign exchange rate gains and losses on intragroup monetary items are not fully eliminated on consolidation when the intragroup monetary item is transacted between two group entities that have different functional currencies. In addition, the foreign currency risk of a highly probable forecast intragroup transaction may qualify as a hedged item in consolidated financial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss.
...
Effective Date and Transition
...
108A. An entity shall apply the last sentence of paragraph 80, and paragraphs AG99A and AG99B, for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. If an entity has designated as the hedged item an external forecast transaction that
(a) is denominated in the functional currency of the entity entering into the transaction,
(b) gives rise to an exposure that will have an effect on consolidated profit or loss (ie is denominated in a currency other than the group's presentation currency), and
(c) would have qualified for hedge accounting had it not been denominated in the functional currency of the entity entering into it,
it may apply hedge accounting in the consolidated financial statements in the period(s) before the date of application of the last sentence of paragraph 80, and paragraphs AG99A and AG99B.
108B. An entity need not apply paragraph AG99B to comparative information relating to periods before the date of application of the last sentence of paragraph 80 and paragraph AG99A.
In Appendix A, Application Guidance, paragraphs AG99A and AG99B are renumbered AG99C and AG99D. Paragraphs AG99A, AG99B and AG133 are added.
Appendix A Application Guidance
Hedged Items (paragraphs 78-84)
Qualifying Items (paragraphs 78-80)
...
AG99A. Paragraph 80 states that in consolidated financial statements the foreign currency risk of a highly probable forecast intragroup transaction may qualify as a hedged item in a cash flow hedge, provided the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss. For this purpose an entity can be a parent, subsidiary, associate, joint venture or branch. If the foreign currency risk of a forecast intragroup transaction does not affect consolidated profit or loss, the intragroup transaction cannot qualify as a hedged item. This is usually the case for royalty payments, interest payments or management charges between members of the same group unless there is a related external transaction. However, when the foreign currency risk of a forecast intragroup transaction will affect consolidated profit or loss, the intragroup transaction can qualify as a hedged item. An example is forecast sales or purchases of inventories between members of the same group if there is an onward sale of the inventory to a party external to the group. Similarly, a forecast intragroup sale of plant and equipment from the group entity that manufactured it to a group entity that will use the plant and equipment in its operations may affect consolidated profit or loss. This could occur, for example, because the plant and equipment will be depreciated by the purchasing entity and the amount initially recognised for the plant and equipment may change if the forecast intragroup transaction is denominated in a currency other than the functional currency of the purchasing entity.
AG99B. If a hedge of a forecast intragroup transaction qualifies for hedge accounting, any gain or loss that is recognised directly in equity in accordance with paragraph 95(a) shall be reclassified into profit or loss in the same period or periods during which the foreign currency risk of the hedged transaction affects consolidated profit or loss.
Transition (paragraphs 103-108A)
AG133. An entity may have designated a forecast intragroup transaction as a hedged item at the start of an annual period beginning on or after 1 January 2005 (or, for the purpose of restating comparative information, the start of an earlier comparative period) in a hedge that would qualify for hedge accounting in accordance with this Standard (as amended by the last sentence of paragraph 80). Such an entity may use that designation to apply hedge accounting in consolidated financial statements from the start of the annual period beginning on or after 1 January 2005 (or the start of the earlier comparative period). Such an entity shall also apply paragraphs AG99A and AG99B from the start of the annual period beginning on or after 1 January 2005. However, in accordance with paragraph 108B, it need not apply paragraph AG99B to comparative information for earlier periods.

Basis for Conclusions
In the Basis for Conclusions on IAS 39, paragraph BC222(s)-(u) is renumbered BC222(t)-(v), and a new subparagraph (s) is inserted.
BC222. The main changes from the Exposure Draft's proposals are as follows:
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(s) The Exposure Draft maintained the prior guidance that a forecast intragroup transaction may be designated as the hedged item in a foreign currency cash flow hedge provided the transaction is highly probable, meets all other hedge accounting criteria, and will result in the recognition of an intragroup monetary item. The Standard (as revised in 2003) did not include this guidance in the light of comments received from some constituents questioning its conceptual basis. After the revised Standard was issued, constituents raised concerns that it was common practice for entities to designate a forecast intragroup transaction as the hedged item and that the revised IAS 39 created a difference from US GAAP. In response to these concerns, the Board published an Exposure Draft in July 2004. That Exposure Draft proposed to allow an entity to apply hedge accounting in the consolidated financial statements to a highly probable forecast external transaction denominated in the functional currency of the entity entering into the transaction, provided the transaction gave rise to an exposure that would have an effect on the consolidated profit or loss (ie was denominated in a currency other than the group's presentation currency). After discussing the comment letters received on that Exposure Draft, the Board decided to permit the foreign currency risk of a forecast intragroup transaction to be the hedged item in a cash flow hedge in consolidated financial statements provided the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss. In issuing this amendment the Board concluded that:
(i) allowing a forecast intragroup transaction to be designated as the hedged item in consolidated financial statements is consistent with the functional currency framework in IAS 21 The Effects of Changes in Foreign Exchange Rates, which recognises a functional currency exposure whenever a transaction (including a forecast transaction) is denominated in a currency different from the functional currency of the entity entering into the transaction.
(ii) allowing a forecast transaction (intragroup or external) to be designated as the hedged item in consolidated financial statements would not be consistent with the functional currency framework in IAS 21 if the transaction is denominated in the functional currency of the entity entering into it. Accordingly, such transactions should not be permitted to be designated as hedged items in a foreign currency cash flow hedge.
(iii) it is consistent with paragraphs 97 and 98 that any gain or loss that is recognised directly in equity in a cash flow hedge of a forecast intragroup transaction should be reclassified into consolidated profit or loss in the same period or periods during which the foreign currency risk of the hedged transaction affects consolidated profit or loss.