Under IFRS 9, there are four ways to adjust: increase the quantity of the hedged item, decrease the quantity of the hedging instrument, increase the quantity of the hedging instrument, or decrease the quantity of the hedged item. Rebalancing is treated as a continuation of the hedging relationship, and hedge ineffectiveness is measured and recognized in profit or loss immediately before the adjustment.
Consider a hypothetical example in which company S hedges 100 tonnes of a commodity with a forward contract of 100 tonnes and reduces the hedging instrument to 90 tonnes. The 10 tonnes of forward contract taken out are measured at fair value through profit or loss unless they are designated in another hedging relationship.
If the risk management objective has changed, hedge accounting is discontinued rather than rebalanced. A change that cannot be compensated for by changing the ratio, such as a default by the derivative used as the hedging instrument, is also not eligible for rebalancing.