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HEDGE ACCOUNTING (RELEVANT EXTRACT – IAS 39)

HEDGE ACCOUNTING (RELEVANT EXTRACT – IAS 39). CA. NIRMAL GHORAWAT B. Com (Hons), ACA. IAS 39. INTRODUCTION – HEDGE ACCOUNTING. Accounting Mismatch. Hedge Accounting seeks to ELIMINATE these Accounting Mismatch.

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HEDGE ACCOUNTING (RELEVANT EXTRACT – IAS 39)

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  1. HEDGE ACCOUNTING(RELEVANT EXTRACT – IAS 39) CA. NIRMAL GHORAWAT B. Com (Hons), ACA

  2. IAS 39 INTRODUCTION – HEDGE ACCOUNTING Accounting Mismatch Hedge Accounting seeks to ELIMINATE these Accounting Mismatch. It recognises the OFFSETTING EFFECTS on P & L of Changes in Fair Value of the Hedging Instrument and the Hedged Item Timing Differences Recognition Measurement Hedged Item is not yet Recognised Hedged Item is not Measured at Fair Value

  3. IAS 39 HEDGE ACCOUNTING - DEFINITIONS

  4. IAS 39 AG HEDGE ACCOUNTING What can Qualify as a Hedging Instrument? Purchased Options An HTM Investment for Foreign Currency Risk Written Options Entity’s own equity instruments AFS Investment in Unquoted Equity Share not carried at Fair Value Stock Index

  5. IAS 39 AG HEDGE ACCOUNTING What can Qualify as a Hedged Item? An Exposure to a risk that affects the Income Statement An AFS Security A Loan / Receivable Foreign currency monetary item A HTM Investment for interest rate risk An Investment in Associate or Subsidiary Non financial asset or Liability A general business Risk Derivative

  6. IAS 39 HEDGE ACCOUNTING Types of Risk which can be Hedged Exposure to these Risk can arise from changes in IAS 39 recognises 3 types of Hedge Relationship 1. Fair Value Hedge II. Cash Flow Hedge III. Hedge of Net Investment in Foreign Operation

  7. IAS 39 TYPES OF HEDGES • Fair value hedges • Hedge of exposure to changes in fair value of a recognised asset or liability; an unrecognised firm commitment; or an identified portion of any of the above two; • that is attributable to a particular risk; and • would affect P&L. • Cash flow hedges Hedge of exposure to variability in cash flows that is: • attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (also an inter-company one); and • would affect P&L. • Hedge of a Net Investment in Foreign Operation • The Net Investment in Foreign Operation is the amount of a reporting entity’s interest in the net assets of that operation.

  8. IAS 39 CONDITIONS FOR HEDGE ACCOUNTING • Formal Documentation at Inception • Entity’s Risk Management Objective and Strategy • Formal Designation of Hedging Relationship by Identification of • Hedging Instrument • Related Hedged Item or Transaction • Nature of Risk being Hedged • How the Entity will assess the Hedging Instrument’s EFFECTIVENESS. • Hedge Effectiveness – The Hedge should be expected to be Highly Effective in achieving offsetting changes in Fair Value or Cash Flow attributable to the hedged risk – At Inception and subsequent periods. • Hedge Effectiveness – can be Reliably measured.

  9. IAS 39 HEDGE EFFECTIVENESS Prospective Assessment • At Inception and throughout the life of Hedge • Testing Methods eg. Regression Analysis • Range of 80% - 125% Retrospective Assessment • At each Reporting Date and throughout the life of Hedge • Testing Methods eg. Regression Analysis, etc. • Range of 80% - 125% Discontinue Hedge Accounting 125 % Ineffectiveness to P & L 100 % Ineffectiveness to P & L 80 % Discontinue Hedge Accounting

  10. IAS 39 MEASUREMENT MISMATCH HEDGE ACCOUNTING – FAIR VALUE • Fair value hedges • Hedge of exposure to changes in fair value of a recognised asset or liability; an unrecognised firm commitment; or an identified portion of any of the above two; • that is attributable to a particular risk; and • would affect P&L. RECOGNITION OF GAINS & LOSSES ON HEDGED ITEM AT FAIR VALUE THROUGH P & L.

  11. IAS 39 MECHANICS HEDGE ACCOUNTING – FAIR VALUE Change in Fair Value of Hedged Item Changes in Fair Value of Hedging Instrument Effective Ineffective P & L P & L P & L

  12. IAS 39 RECOGNITION MISMATCH HEDGE ACCOUNTING – CASH FLOW • Hedge of exposure to variability in cash flows that is: • attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (also an inter-company one); and • would affect P&L. DEFER RECOGNITION OF GAINS & LOSSES ON HEDGING INSTRUMENT

  13. IAS 39 MECHANICS HEDGE ACCOUNTING – CASH FLOW Change in Fair Value of Hedged Item Changes in Fair Value of Hedging Instrument Ineffective Effective Not Recognised OCI (Equity) P & L Recycled when Hedged Item affects Earnings

  14. IAS 39 RECOGNITION MISMATCH HEDGE ACCOUNTING – NIFO Hedge of a Net Investment in Foreign Operation The Net Investment in Foreign Operation is the amount of a reporting entity’s interest in the net assets of that operation. MATCH RECOGNITION IN EQUITY OF GAINS & LOSSES ON HEDGING INSTRUMENT

  15. IAS 39 MECHANICS HEDGE ACCOUNTING – NIFO Change in Fair Value of Hedged Item Changes in Fair Value of Hedging Instrument Ineffective Effective OCI (Equity) OCI (Equity) P & L Recycled on Disposal of Foreign Operation

  16. IAS 39 DISCONTINUATION OF HEDGE ACCOUNTING • Prospective Discontinuation IF:: • Hedging Instrument expires, is sold, terminated or exercised. • Hedge no longer meets the criteria for Hedge Accounting. • The entity revokes the Designation. • On Discontinuation

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