8.3.1 Background Information

On 15 July 20X0, ABC issued a USD-denominated floating rate bond. ABC's functional currency was the EUR. The bond had the following main terms:

Since ABC's objective was to raise EUR fixed funding, on the issue date ABC entered into a CCS. Through the CCS, the entity agreed to receive a floating rate equal to the bond coupon and pay a EUR fixed amount. The CCS had the following terms:

The mechanics of the CCS are described next. It can be seen that through the combination of the USD bond and the CCS, ABC synthetically obtained a EUR fixed liability.

On the issue date at the start of the CCS, there was an initial exchange of nominal amounts through the CCS: ABC delivered the USD 100 million debt issuance proceeds and received EUR 80 million. The resulting EUR–USD exchange rate was 1.2500. The combination of the bond and CCS had the same effect as if ABC had issued a EUR-denominated bond, as shown in Figure 8.7.

An exchange of interest payments took place annually. ABC received USD Libor-linked interest on the USD nominal and paid 5.19% interest on the EUR nominal. ABC used the USD Libor cash flows it received under the CCS to pay the bond interest. Figure 8.8 shows the strategy's intermediate cash flows.

On maturity of the CCS and the debt, ABC re-exchanged the CCS nominals, using the USD 100 million it received through the CCS to redeem the bond issue, and delivering EUR 80 million to the CCS counterparty. Note that this final exchange was made at exactly the same rate used in the initial exchange (1.2500). Figure 8.9 shows the strategy's cash flows at maturity.

Because the aim of the CCS was to eliminate the EUR variability of the cash flows stemming from the floating rate bond, ABC designated the CCS as the hedging instrument in a cash flow hedge. The exposures being hedged were the bond's interest rate and exchange rate risks. As explained in Section 8.1.2, the bond's credit risk was excluded from the hedging relationship.

ABC used a hypothetical derivative when assessing effectiveness and calculating effective and ineffective amounts, a tool that could be applied for cash flow hedges. Therefore, ABC did not need to fair value the hedged item, fair valuing instead a hypothetical derivative. In my view, in our case it was simpler to fair value the hedged item than to fair value the hypothetical derivative, but I have used the hypothetical derivative approach because it is the approach commonly used by the accounting community for cash flow hedges.

8.3.2 Hedging Relationship Documentation

ABC documented the hedging relationship as follows:

8.3.3 Hedge Effectiveness Assessment

Hedge effectiveness will be assessed by comparing changes in the fair value of the hedging instrument to changes in the fair value of a hypothetical derivative. The terms of the hypothetical derivative are such that its fair value changes exactly offset the changes in fair value of the hedged item for the risk being hedged. The hypothetical derivative is a theoretical cross-currency swap with no counterparty credit risk and with zero initial fair value, whose main terms are as follows:

The EUR leg fixed rate of the hypothetical derivative is higher than that of the hedging instrument due to the absence of CVA in the former.

Changes in the fair value of the hedging instrument will be recognised as follows:

• The effective part of the gain or loss on the hedging instrument will be recognised in the cash flow hedge reserve of OCI in equity, after taking into account the bond's retranslation gains/losses. The accumulated amount in equity will be reclassified to profit or loss in the same period during which the hedged expected future cash flow affects profit or loss, adjusting interest expense.
• The ineffective part of the gain or loss on the hedging instrument will be recognised immediately in profit or loss.

Hedge effectiveness will be assessed prospectively at hedging relationship inception, on an ongoing basis at least upon each reporting date and upon occurrence of a significant change in the circumstances affecting the hedge effectiveness requirements.

The hedging relationship will qualify for hedge accounting only if all the following criteria are met:

1. The hedging relationship consists only of eligible hedge items and hedging instruments. The hedge item is eligible as it is a group of highly expected forecast cash flows that exposes the entity to fair value risk, affects profit or loss and is reliably measurable. The hedging instrument is eligible as it is a derivative that does not result in a net written option.
2. At hedge inception there is a formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for undertaking the hedge.
3. The hedging relationship is considered effective.

The hedging relationship will be considered effective if the following three requirements are met:

1. There is an economic relationship between the hedged item and the hedging instrument.
2. The effect of credit risk does not dominate the value changes that result from that economic relationship.
3. The hedge ratio of the hedging relationship is the same as that resulting from the quantity of hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. The hedge ratio should not be intentionally weighted to create ineffectiveness.

Whether there is an economic relationship between the hedged item and the hedging instrument will be assessed on a qualitative basis by comparing the critical terms (notional, interest periods, underlying and fixed rates) of the hypothetical derivative and the hedging instrument. The assessment will be complemented by a quantitative assessment using the scenario analysis method for one scenario in which USD Libor and Euribor interest rates will be shifted upwards by 2%, the EUR–USD spot rate increased by 10%, and the changes in fair value of the hypothetical derivative and the hedging instrument compared.

8.3.4 Hedge Effectiveness Assessment Performed at the Start of the Hedging Relationship

The hedging relationship was considered effective as the following three requirements were met:

1. There was an economic relationship between the hedged item and the hedging instrument. Based on the qualitative assessment performed supported by a quantitative analysis, the entity concluded that the change in fair value of the hedged item was expected to be substantially offset by the change in fair value of the hedging instrument, corroborating that both elements had values that would generally move in opposite directions.
2. The effect of credit risk did not dominate the value changes resulting from that economic relationship as the credit ratings of both the entity and XYZ Bank were considered sufficiently strong.
3. The hedge ratio of the hedging relationship was the same as that resulting from the quantity of hedged item that the entity actually hedged and the quantity of the hedging instrument that the entity actually used to hedge that quantity of hedged item. The hedge ratio was not intentionally weighted to create ineffectiveness.

Due to the fact that the terms of the hedging instrument and those of the expected cash flow closely matched and the low credit risk exposure to the counterparty of the cross-currency swap contract, it was concluded that the hedging instrument and the hedged item had values that would generally move in opposite directions. This conclusion was supported by a quantitative assessment, which consisted of one scenario analysis performed as follows. A parallel shift of +2% in the USD Libor and Euribor interest rates and +10% in the EUR–USD spot rate, occurring on the assessment date, was simulated. The fair values of the hedging instrument and the hypothetical derivatives were calculated and compared to their initial fair values. As shown in the table below, the high degree of offset implied that the change in fair value of the hedged item was expected to be largely offset by the change in fair value of the hedging instrument, corroborating that both elements had values that would generally move in opposite directions.

The following potential sources of ineffectiveness were identified:

• a substantial deterioration in credit risk of either the entity or the counterparty to the hedging instrument; and
• a change in the timing or amounts of the hedged highly expected cash flows.

The hedge ratio was set at 1:1.

ABC also performed assessments on each reporting date, yielding the same conclusions. These assessments have been omitted to avoid unnecessary repetition.

8.3.5 Fair Valuations, Effective/Ineffective Amounts and Cash Flow Calculations

8.3.6 Accounting Entries

The required journal entries were as follows.

1. Journal entries on 15 July 20X0

   The bond was issued.

2. No entries were required to record the CCS as its initial fair value was zero.
3. Journal entries on 31 December 20X0

   The accrued interest of the bond was EUR <2,193,000>. The payable related to this accrued interest was EUR <2,164,000>.

4. The accrual of the USD leg of the CCS was EUR 2,193,000. The receivable related to this accrued interest was EUR 2,164,000.
5. The accrual of the EUR leg was EUR <1,949,000>.
6. The retranslation of the bond's carrying amount into EUR resulted in a EUR 1,875,000 gain. The change in fair value of the CCS produced a EUR 1,673,000 loss, fully deemed to be effective. The difference between these two amounts was recognised in the cash flow hedge reserve of equity.
7. Journal entries on 15 July 20X1

   The accrued interest of the bond was EUR <2,533,000>. The payable related to this accrued interest was EUR <2,590,000>.

8. The interest payable corresponding to the bond's previous accrued interest was retranslated, producing a EUR 70,000 loss.
9. The bond coupon was paid using the amount received under the USD leg of the CCS.
10. The accrued interest of the USD leg was EUR 2,533,000. The receivable related to this accrued interest was EUR 2,590,000.
11. The interest receivable corresponding to the USD leg's previous accrued interest was retranslated, producing a EUR 70,000 gain.
12. The interest receivable corresponding to the USD leg was received.
13. The accrual of the EUR leg was EUR <2,261,000>.
14. The interest payable corresponding to the EUR leg was paid.
15. Journal entries on 31 December 20X1

    The accrued interest of the bond was EUR <2,305,000>. The payable related to this accrued interest was EUR <2,328,000>.

16. The accrual of the USD leg of the CCS was EUR 2,305,000. The receivable related to this accrued interest was EUR 2,328,000.
17. The accrual of the EUR leg was EUR <1,949,000>.
18. The retranslation of the bond's carrying amount into EUR resulted in a EUR 3,842,000 loss. The change in fair value of the CCS produced a EUR 3,798,000 gain, fully deemed to be effective. The difference between these two amounts was recognised in the cash flow hedge reserve of equity.
19. Journal entries on 15 July 20X2

    The accrued interest of the bond was EUR <2,707,000>. The payable related to this accrued interest was EUR <2,722,000>.

20. The interest payable corresponding to the bond's previous accrued interest was retranslated, producing a EUR 19,000 loss.
21. The bond coupon was paid using the USD amounts received under the USD leg of the CCS.
22. The accrued interest of the USD leg was EUR 2,707,000. The receivable related to this accrued interest was EUR 2,722,000.
23. The interest receivable corresponding to the USD leg's previous accrued interest was retranslated, producing a EUR 19,000 gain.
24. The interest receivable corresponding to the USD leg was received.
25. The accrual of the EUR leg was EUR <2,261,000>.
26. The interest payable corresponding to the EUR leg was paid.
27. Journal entries on 31 December 20X2

    The accrued interest of the bond was EUR <2,472,000>. The payable related to this accrued interest was EUR <2,510,000>.

28. The accrual of the USD leg of the CCS was EUR 2,472,000. The receivable related to this accrued interest was EUR 2,510,000.
29. The accrual of the EUR leg was EUR <1,949,000>.
30. The retranslation of the bond's carrying amount into EUR resulted in a EUR 4,990,000 loss. The change in fair value of the CCS produced a EUR 4,772,000 gain, fully deemed to be effective. The difference between these two amounts was recognised in the cash flow hedge reserve of equity.
31. Journal entries on 15 July 20X3

    The accrued interest of the bond was EUR <2,979,000>. The payable related to this accrued interest was EUR <3,044,000>.

32. The interest payable corresponding to the bond's previous accrued interest was retranslated, producing a EUR 114,000 loss.
33. The bond coupon and principal were paid/repaid using the USD leg amounts. The bond principal represented EUR 90,909,000 (= USD 100 mn/1.1000).
34. The accrued interest of the USD leg was EUR 2,979,000. The receivable related to this accrued interest was EUR 3,044,000.
35. The interest receivable corresponding to the USD leg's previous accrued interest was retranslated, producing a EUR 114,000 gain.
36. The interest receivable corresponding to the USD leg was received.
37. The accrual of the EUR leg was EUR <2,261,000>.
38. The interest payable corresponding to the EUR leg was paid.
39. The retranslation of the bond's carrying amount into EUR resulted in a EUR 3,952,000 loss. The change in fair value of the CCS produced a EUR 4,012,000 gain, fully deemed to be effective. The difference between these two amounts was recognised in the cash flow hedge reserve of equity.
40. The CCS notionals were exchanged. ABC paid EUR 80 million and received USD 100 million (worth EUR 90,909,000). The difference was worth EUR 10,909,000 (=90,909,000 – 80 mn).

The following table gives a summary of the accounting entries:

8.3.7 Concluding Remarks

ABC's objective when entering into the combination of the bond and the CCS was to incur an annual expense representing 5.19%, or EUR 4,210,000 (=80 mn × 5.19% × 365/360).

During the first, second and third years of the term of the bond (and of the hedging relationship) the overall impact of the strategy on profit or loss was an annual expense of EUR 4,210,000. The annual net cash outflow was exactly EUR 4,210,000 as well. Therefore, ABC's objective was fully achieved.

This outcome occurred because there were no ineffective amounts. Otherwise, the target still would have been achieved from an annual net cash flow perspective, but not from an annual expense perspective. Even in the presence of inefficiencies, the overall 3-year expense would have been EUR 12,630,000 (=4,210,000 × 3).

As mentioned in the previous case studies, the basis component of the CCS was part of the hedging instrument. A notably volatile behaviour of the basis could have created significant inefficiencies. When the basis component of a CCS is excluded from the hedging instrument, IFRS 9 allows an entity to recognise changes in the fair value of this component either in profit or loss or temporarily in OCI to the extent that those changes relate to the hedged item.

8.4.1 Background Information

On 15 July 20X0, ABC issued a USD-denominated fixed rate bond. ABC's functional currency was the EUR. The bond had the following main terms:

Since ABC's objective was to raise EUR fixed funding, on the issue date ABC entered into a CCS. Through the CCS, the entity agreed to receive a fixed rate equal to the bond coupon and pay a EUR fixed amount. The CCS had the following terms:

The mechanics of the CCS are described next. It can be seen that through the combination of the USD bond and the CCS, ABC synthetically obtained a EUR fixed liability.

On the issue date at the start of the CCS, there was an initial exchange of nominal amounts through the CCS: ABC delivered the USD 100 million debt issuance proceeds and received EUR 80 million. The resulting EUR–USD exchange rate was 1.2500. The combination of the bond and CCS had the same effect as if ABC had issued a EUR-denominated bond, as shown in Figure 8.10.

An exchange of interest payments took place annually. ABC received 6.09% interest on the USD nominal and paid 5.19% interest on the EUR nominal. ABC used the USD cash flows it received under the CCS to pay the bond interest. Figure 8.11 shows the strategy's intermediate cash flows.

On maturity of the CCS and the debt, ABC re-exchanged the CCS nominals, using the USD 100 million it received through the CCS to redeem the bond issue, and delivering EUR 80 million to the CCS counterparty. Note that this final exchange was made at exactly the same rate used in the initial exchange (1.2500). Figure 8.12 shows the strategy's cash flows at maturity.

Because the aim of the CCS was to eliminate the EUR variability of the cash flows stemming from the foreign currency fixed rate bond, ABC designated the CCS as the hedging instrument in a cash flow hedge. The exposure being hedged was the bond's exchange rate risks. As explained in Section 8.1.2, the bond's credit risk was excluded from the hedging relationship. Also, because of its fixed rate coupons, the bond did not expose ABC to interest rate risk.

ABC used a hypothetical derivative when assessing effectiveness and calculating effective and ineffective amounts, a tool that could be applied for cash flow hedges. Therefore, ABC did not need to fair value the hedged item, fair valuing instead a hypothetical derivative.

8.4.2 Hedging Relationship Documentation

ABC documented the hedging relationship as follows:

8.4.3 Hedge Effectiveness Assessment

Hedge effectiveness will be assessed by comparing changes in the fair value of the hedging instrument to changes in the fair value of a hypothetical derivative. The terms of the hypothetical derivative are such that its fair value changes exactly offset the changes in fair value of the hedged item for the risk being hedged. The hypothetical derivative is a theoretical cross-currency swap with no counterparty credit risk and with zero initial fair value, whose main terms are as follows:

The EUR leg fixed rate of the hypothetical derivative is higher than that of the hedging instrument due to the absence of CVA in the former.

Changes in the fair value of the hedging instrument will be recognised as follows:

• The effective part of the gain or loss on the hedging instrument will be recognised in the cash flow hedge reserve of OCI in equity, after taking into account the bond's retranslation gains/losses. The accumulated amount in equity will be reclassified to profit or loss in the same period during which the hedged expected future cash flow affects profit or loss, adjusting interest expense.
• The ineffective part of the gain or loss on the hedging instrument will be recognised immediately in profit or loss.

Hedge effectiveness will be assessed prospectively at hedging relationship inception, on an ongoing basis at least upon each reporting date and upon occurrence of a significant change in the circumstances affecting the hedge effectiveness requirements.

The hedging relationship will qualify for hedge accounting only if all the following criteria are met:

1. The hedging relationship consists only of eligible hedge items and hedging instruments. The hedge item is eligible as it is a group of highly expected forecast cash flows that exposes the entity to fair value risk, affects profit or loss and is reliably measurable. The hedging instrument is eligible as it is a derivative that does not result in a net written option.
2. At hedge inception there is a formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for undertaking the hedge.
3. The hedging relationship is considered effective.

The hedging relationship will be considered effective if the following three requirements are met:

1. There is an economic relationship between the hedged item and the hedging instrument.
2. The effect of credit risk does not dominate the value changes that result from that economic relationship.
3. The hedge ratio of the hedging relationship is the same as that resulting from the quantity of hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. The hedge ratio should not be intentionally weighted to create ineffectiveness.

Whether there is an economic relationship between the hedged item and the hedging instrument will be assessed on a qualitative basis by comparing the critical terms (notional, interest periods, underlying and fixed rates) of the hypothetical derivative and the hedging instrument. The assessment will be complemented by a quantitative assessment using the scenario analysis method for one scenario in which the EUR–USD spot rate will be increased by 10%, and the changes in fair value of the hypothetical derivative and the hedging instrument compared.

8.4.4 Hedge Effectiveness Assessment Performed at the Start of the Hedging Relationship

The hedging relationship was considered effective as the following three requirements were met:

1. There was an economic relationship between the hedged item and the hedging instrument. Based on the qualitative assessment performed supported by a quantitative analysis, the entity concluded that the change in fair value of the hedged item was expected to be substantially offset by the change in fair value of the hedging instrument, corroborating that both elements had values that would generally move in opposite directions.
2. The effect of credit risk did not dominate the value changes resulting from that economic relationship as the credit ratings of both the entity and XYZ Bank were considered sufficiently strong.
3. The hedge ratio of the hedging relationship was the same as that resulting from the quantity of hedged item that the entity actually hedged and the quantity of the hedging instrument that the entity actually used to hedge that quantity of hedged item. The hedge ratio was not intentionally weighted to create ineffectiveness.

Due to the fact that the terms of the hedging instrument and those of the expected cash flow closely matched and the low credit risk exposure to the counterparty of the cross-currency swap contract, it was concluded that the hedging instrument and the hedged item had values that would generally move in opposite directions. This conclusion was supported by a quantitative assessment, which consisted of one scenario analysis performed as follows. A EUR–USD spot rate increase by 10% occurring on the assessment date was simulated. The fair values of the hedging instrument and the hypothetical derivatives were calculated and compared to their initial fair values. As shown in the table below, the high degree of offset implied that the change in fair value of the hedged item was expected to largely be offset by the change in fair value of the hedging instrument, corroborating that both elements had values that would generally move in opposite directions.

The following potential sources of ineffectiveness were identified:

• a substantial deterioration in credit risk of either the entity or the counterparty to the hedging instrument; and
• a change in the timing or amounts of the hedged highly expected cash flows.

The hedge ratio was set at 1:1.

ABC also performed assessments on each reporting date, yielding the same conclusions. These assessments have been omitted to avoid unnecessary repetition.

8.4.5 Fair Valuations, Effective/Ineffective Amounts and Cash Flow Calculations

8.4.6 Accounting Entries

The required journal entries were as follows.

1. Journal entries on 15 July 20X0.

   The bond was issued.

2. No entries were required to record the CCS as its initial fair value was zero.
3. Journal entries on 31 December 20X0

   The accrued interest of the bond was EUR <2,264,000>. The payable related to this accrued interest was EUR <2,234,000>.

4. The accrual of the USD leg of the CCS was EUR 2,264,000. The receivable related to this accrued interest was EUR 2,234,000.
5. The accrual of the EUR leg was EUR <1,949,000>.
6. The retranslation of the bond's carrying amount into EUR resulted in a EUR 1,875,000 gain. The change in fair value of the CCS produced a EUR 1,882,000 loss, fully deemed to be effective. The difference between these two amounts was recognised in the cash flow hedge reserve of equity.
7. Journal entries on 15 July 20X1

   The accrued interest of the bond was EUR <2,615,000>. The payable related to this accrued interest was EUR <2,674,000>.

8. The interest payable corresponding to the bond's previous accrued interest was retranslated, producing a EUR 72,000 loss.
9. The bond coupon was paid using the amount received under the USD leg of the CCS.
10. The accrued interest of the USD leg was EUR 2,615,000. The receivable related to this accrued interest was EUR 2,674,000.
11. The interest receivable corresponding to the USD leg's previous accrued interest was retranslated, producing a EUR 72,000 gain.
12. The interest receivable corresponding to the USD leg was received.
13. The accrual of the EUR leg was EUR <2,261,000>.
14. The interest payable corresponding to the EUR leg was paid.
15. Journal entries on 31 December 20X1

    The accrued interest of the bond was EUR <2,321,000>. The payable related to this accrued interest was EUR <2,343,000>.

16. The accrual of the USD leg of the CCS was EUR 2,321,000. The receivable related to this accrued interest was EUR 2,343,000.
17. The accrual of the EUR leg was EUR <1,949,000>.
18. The retranslation of the bond's carrying amount into EUR resulted in a EUR 3,842,000 loss. The change in fair value of the CCS produced a EUR 3,795,000 gain, fully deemed to be effective. The difference between these two amounts was recognised in the cash flow hedge reserve of equity.
19. Journal entries on 15 July 20X2

    The accrued interest of the bond was EUR <2,725,000>. The payable related to this accrued interest was EUR <2,740,000>.

20. The interest payable corresponding to the bond's previous accrued interest was retranslated, producing a EUR 19,000 loss.
21. The bond coupon was paid using the USD amounts received under the USD leg of the CCS.
22. The accrued interest of the USD leg was EUR 2,725,000. The receivable related to this accrued interest was EUR 2,740,000.
23. The interest receivable corresponding to the USD leg's previous accrued interest was retranslated, producing a EUR 19,000 gain.
24. The interest receivable corresponding to the USD leg was received.
25. The accrual of the EUR leg was EUR <2,261,000>.
26. The interest payable corresponding to the EUR leg was paid.
27. Journal entries on 31 December 20X2

    The accrued interest of the bond was EUR <2,448,000>. The payable related to this accrued interest was EUR <2,486,000>.

28. The accrual of the USD leg of the CCS was EUR 2,448,000. The receivable related to this accrued interest was EUR 2,486,000.
29. The accrual of the EUR leg was EUR <1,949,000>.
30. The retranslation of the bond's carrying amount into EUR resulted in a EUR 4,990,000 loss. The change in fair value of the CCS produced a EUR 4,958,000 gain, fully deemed to be effective. The difference between these two amounts was recognised in the cash flow hedge reserve of equity.
31. Journal entries on 15 July 20X3

    The accrued interest of the bond was EUR <2,950,000>. The payable related to this accrued interest was EUR <3,015,000>.

32. The interest payable corresponding to the bond's previous accrued interest was retranslated, producing a EUR 113,000 loss.
33. The bond coupon and principal were paid/repaid using the amounts received under the USD leg of the CCS. The bond principal represented EUR 90,909,000 (= USD 100 mn/1.1000).
34. The accrued interest of the USD leg was EUR 2,950,000. The receivable related to this accrued interest was EUR 3,015,000.
35. The interest receivable corresponding to the USD leg's previous accrued interest was retranslated, producing a EUR 113,000 gain.
36. The interest receivable corresponding to the USD leg was received.
37. The accrual of the EUR leg was EUR <2,261,000>.
38. The interest payable corresponding to the EUR leg was paid.
39. The retranslation of the bond's carrying amount into EUR resulted in a EUR 3,952,000 loss. The change in fair value of the CCS produced a EUR 4,038,000 gain, fully deemed to be effective. The difference between these two amounts was recognised in the cash flow hedge reserve of equity.
40. The CCS notionals were exchanged. ABC paid EUR 80 million and received USD 100 million (worth EUR 90,909,000). The difference was worth EUR 10,909,000 (=90,909,000 – 80 mn).

The following table gives a summary of the accounting entries:

8.4.7 Concluding Remarks

ABC's objective when entering into the combination of the bond and the CCS was to incur an annual expense representing 5.19%, or EUR 4,210,000 (=80 mn × 5.19% × 365/360).

During the first, second and third years of the term of the bond (and of the hedging relationship) the overall impact of the strategy on profit or loss was an annual expense of EUR 4,210,000. The annual net cash outflow was exactly EUR 4,210,000 as well. Therefore, ABC's objective was fully achieved.

This outcome occurred because there were no ineffective amounts. Otherwise, the target still would have been achieved from an annual net cash flow perspective, but not from an annual expense perspective. Even in the presence of inefficiencies, the overall 3-year expense would have been EUR 12,630,000 (=4,210,000 × 3).

As mentioned in the previous case studies, the basis component of the CCS was part of the hedging instrument. A notably volatile behaviour of the basis could have created significant inefficiencies. When the basis component of a CCS is excluded from the hedging instrument, IFRS 9 allows an entity to recognise changes in the fair value of this component either in profit or loss or temporarily in OCI to the extent that those changes relate to the hedged item.