Under IFRS 9, changes in the excluded part are recorded in other comprehensive income and recognized in profit or loss in line with when the hedged item affects profit or loss. When the time value of an option is excluded, the treatment is set as follows. If the hedged item is transaction related (the time value has the character of a cost of the transaction), the changes are recorded in other comprehensive income and reclassified to profit or loss when the transaction affects profit or loss. If it is time-period related (the time value has the character of a cost of obtaining protection over a period), the initial time value is allocated to profit or loss over that period. The forward element of a forward contract and a currency basis spread can be given the same treatment as an election.
Consider a hypothetical example in which the time value of a one-year call option bought for a premium of 12 million yen is excluded, and that value falls by 12 million yen by expiry. If the hedged item is a purchase of raw materials, the 12 million yen is added to the cost of the raw materials. Whether the raw material price rises and the option gains intrinsic value, or the price falls and the option becomes worthless, the treatment of the time value part is the same.
The text of Chapter 6 of IFRS 9 does not use the term "cost of hedging." The term is how audit firm publications refer to it. Under ASC 815, the excluded part is called an excluded component, and the entity chooses between amortizing it and recognizing changes in its fair value in profit or loss.