For a designation in cash flow hedge accounting, it must first be examined whether the expected cash outflow from the granting of the share-based payment transaction qualifies as a hedged item within the meaning of IFRS 9. This is a planned transaction, the amount of which is uncertain due to fluctuations in the share price and depending on vesting. If the beneficiaries do not fulfil predefined performance conditions or if the employment relationship is terminated during the vesting period, this leads to a partial or even total loss of the payment claim, depending on the specific structure of the programmes. In this respect, the probability of occurrence of the hedged transaction is of particular importance when hedging share-based payments. Only if the probability of occurrence can be shown to be at least 90% or higher does the hedged transaction also constitute a designatable hedged item within the meaning of IFRS 9.
Furthermore, the effectiveness of the hedging relationship must be demonstrated continuously from designation to scheduled termination. In addition to the usual requirements of a credit risk that does not dominate the hedging relationship and a hedge ratio derived from the actual quantities of hedged risk and the corresponding contracted hedging transaction, the hedging of share-based payments poses special challenges for the proof of an economic relationship, which is also required.
In this context, the company must demonstrate with sufficient certainty that the changes in value of the hedging transactions concluded and the payment obligation from the cash-settled share-based payments offset each other. In addition to a qualitative analysis of matching parameters as part of the critical terms match method, it is also necessary to calculate retrospective ineffectiveness using the dollar offset method, for example. Since in practice, for reasons of simplification and cost, features of the hedged item such as settlement at the average rate or upper price limits are neglected in the design of the hedging transactions, the parameters of the hedged item and hedging transaction relevant to measurement regularly differ in the case discussed here. Furthermore, additional features, such as an exchange of dividends and interest over the term of the hedge, are also agreed for the hedging transactions. All such deviations between the hedged item and the hedging instrument inevitably influence the effectiveness of the hedging relationship and therefore lead to significant ineffectiveness to be recognised in profit or loss.
Finally, the modified grant date method from IFRS 2 for the cash-settled share-based payment must be harmonised with the hedging result for accounting purposes. Appraisee effects of the hedging transaction that are assessed as effective are initially recognised in the cash flow hedge reserve in equity and reclassified to profit or loss in the same way as the effect of the hedged item on profit or loss. For this purpose, changes in the value of the hedging transaction are recognised in the income statement on each reporting date in the amount of the pro rata (personnel) expenses arising from the cash settlement. However, effective changes in the value of the hedge that exceed this amount remain in the cash flow hedge reserve until later periods.
