Commission Regulation (EC) No 2106/2005 of  21 December 2005  amending Regulation (EC) No 1725/2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council, as regards International Accounting Standard (IAS) 39   (Text with EEA relevance)
Date: 2005-12-21
Institutions: European Commission
Subjects: accounting, capital market, international standard

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Official Journal of the European Union

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COMMISSION REGULATION (EC) No 2106/2005

of 21 December 2005

amending Regulation (EC) No 1725/2003 adopting certain international accounting standards in
accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council,
as regards International Accounting Standard (IAS) 39

(Text with EEA relevance)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty
Community,

establishing the European

in consolidated financial statements. It is a common risk
management practice to designate the foreign currency
risk of a forecast intragroup transaction as the hedged
item and the current
IAS 39 did not permit hedge
accounting for this. Under the current IAS 39 only a
transaction external to the entity can be designated as
a hedged item.

Having regard to Regulation (EC) No 1606/2002 of
the
European Parliament and of the Council of 19 July 2002 on
the application of international accounting standards (1), and in
particular Article 3(1) thereof,

(4)

The consultation with technical experts in the field
confirms that
the
technical criteria for adoption set out in Article 3 of
Regulation (EC) No 1606/2002.

the amendments to IAS 39 meet

Whereas:

(1)

(2)

By Commission Regulation (EC) No 1725/2003 (2),
certain international standards and interpretations that
were extant at 14 September 2002 were adopted.

exclusion of

The Commission adopted International Accounting
Standard (IAS) 39 with the
certain
provisions relating to the full Fair Value Option and
hedge accounting, by Commission Regulation (EC) No
2086/2004 of 19 November 2004 amending Regulation
(EC) No 1725/2003 on the adoption of certain interna-
tional accounting standards in accordance with Regu-
lation (EC) No 1606/2002 of the European Parliament
and of the Council as regards the insertion of IAS 39 (3).
The Commission adopted improved IAS 39 standard for
limited fair value option by Commission Regulation (EC)
No 1864/2005 (4).

(3)

International Accounting
the
On 14 April 2005,
to
Standards Board (IASB) published an amendment
IAS 39 allowing entities in particular to designate,
in
certain circumstances, a forecast intragroup transaction
denominated in a foreign currency as the hedged item

(1) OJ L 243, 11.9.2002, p. 1.
(2) OJ L 261, 13.10.2003, p. 1. Regulation as last amended by Regu-

lation (EC) No 1910/2005 (OJ L 305, 24.11.2005, p. 4).

(3) OJ L 363, 9.12.2004, p. 1.
(4) OJ L 299, 16.11.2005, p. 45.

(5)

Regulation (EC) No 1725/2003 should therefore be
amended accordingly.

(6)

The measures provided for in this Regulation are in
accordance with the opinion of the Accounting Regu-
latory Committee,

HAS ADOPTED THIS REGULATION:

Article 1

In the Annex to Regulation (EC) No 1725/2003 International
Accounting Standard (IAS) 39 is amended as set out in the
Annex to this Regulation.

Article 2

Each company shall apply the amendments to IAS 39 as set out
in the Annex to this Regulation as from the commencement
date of its 2006 financial year at the latest.

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This Regulation shall enter into force on the third day following its publication in the Official Journal of the
European Union.

Article 3

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 21 December 2005.

For the Commission

Charlie McCREEVY
Member of the Commission

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Official Journal of the European Union

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International Accounting Standard (IAS) 39 is amended as follows:

ANNEX

INTERNATIONAL ACCOUNTING STANDARDS

IAS No

Title

IAS 39

Financial Instruments: Recognition and measurement

Reproduction allowed within the European Economic Area. All existing rights reserved outside the EEA, with
the exception of the right to reproduce for the purposes of personal use or other fair dealing. Further infor-
mation can be obtained from the IASB at www.iasb.org

1. Paragraph 80 is replaced by the following:

‘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 (e.g. 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 in accordance with IAS 21
“The Effects of Changes in Foreign Exchange Rates”. 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.’

2. The following paragraphs 108A and 108B are inserted:

‘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.’

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3. In Appendix A, Application Guidance, paragraphs AG99A and AG99B are renumbered AG99C and AG99D and

following paragraphs AG99A, AG99B and AG133 are inserted:

‘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 manu-
factured 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.

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,
it need not apply paragraph AG99B to
comparative information for earlier periods.’

in accordance with paragraph 108B,