ACT3127 Advanced Financial Accounting II - PowerPoint PPT Presentation

ACT3127 Advanced Financial Accounting II

Financial Instruments

FRS 132 : Presentation and DisclosureIFRS 7: Disclosure

• Hedging and Hedge Accounting
• FRS 132: FI – Presentation and Disclosures
• IFRS 7: Disclosures
• Conclusion

“Hedging arrangements involve

a hedging instrument offsetting movements

in a hedged item”

(139.9)

• “hedged item” – foreign currency debt
• “hedging instrument” – foreign currency forward contract

• Effective hedging: eliminate???
• Risk exposed:

operating – manufacturing & marketing activities

financial – exposure to market factors

• Which one to hedge?

- distinguish the risks that company is paid to take and the ones that are not

• “..Match the two halves of the hedging relationship, so as not to affect the income statement one-sidedly..”
• Note: ALL trading instrumentsmust be classified as “FV through P&L”. Other FI may be classified under “FV through P&L”.
• Not mandatory

“Hedge accounting can be used only if certain strict criteria are met”

(139.88)

• Hedge formally designated and documented at inception
• Expected to be highly effective (AG105)
• CFH – forecast transaction must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit & loss
• Effectiveness can be reliably measured
• Assessed on an ongoing basis and determined actually to have been highly effective throughout the reporting periods

• Prospective effectiveness test

- forward-looking

- at inception and prepare for FS

• Retrospective effectiveness test

- backward-looking

- prepare for FS

• Understand risk exposures and their effects on financial statements

evaluate the risks exposed to

how do you want to manage

2. Designate/document hedge relationship

- to qualify, include:

risk management objective and strategy

identification of the hedging instrument

the related hedge item or transaction

nature of the risk being hedged

method of assessing the effectiveness

of the hedge

• Account for the hedge relationship

Fair-value hedge

Cash-flow hedge

Exposure to changes in fair-value

Gains / losses recognised in current net income

Exposure to variability of cash flows

Gains / losses recognised in other comprehensive income (equity)

4. Discontinue hedge accounting

inneffective or terminated

(prospective basis)

5. Provide disclosure

Company’s objectives and strategy

Sufficient information to understand hedge accounting’s effect on financial statements

• C.J. Woelfel, Hedging, Encyclopedia of Banking & Finance (9th Edition)
• I.H. Giddy, The Corporate Hedging Process, Bank of Montreal
• I.P.N. Hague, Hedging and new standards, Accounting Standards Board (Canada)
• PWC, IAS 139 – Achieving hedge accounting in practice
• KPMG Guide: FRS 139 – Financial Instruments: Recognition and Measurement

• Presentation (132:15)
• financial assets, liability or equity
• in accordance with the substance of the contract and definition of the above groups

• Disclosure

- To provide information to enhance understanding…(132:51)

• 70 additional disclosure requirements

Criteria used to classify

Capital management strategy

Qualitative disclosure: risks faced and the strategies used to manage them