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ACT3127 Advanced Financial Accounting II. Financial Instruments FRS 132 : Presentation and Disclosure IFRS 7: Disclosure. Contents. Hedging and Hedge Accounting FRS 132: FI – Presentation and Disclosures IFRS 7: Disclosures Conclusion. Hedging: what is. “Hedging arrangements involve

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act3127 advanced financial accounting ii

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 what is
Hedging: what is

“Hedging arrangements involve

a hedging instrument offsetting movements

in a hedged item”


  • “hedged item” – foreign currency debt
  • “hedging instrument” – foreign currency forward contract
hedging the challenge
Hedging: the challenge
  • 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

hedge accounting
Hedge Accounting
  • “..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 criteria
Hedge Accounting: criteria

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


  • 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
hedge accounting effectiveness test
Hedge Accounting: Effectiveness test
  • Prospective effectiveness test

- forward-looking

- at inception and prepare for FS

  • Retrospective effectiveness test

- backward-looking

- prepare for FS

hedge accounting how to apply
Hedge Accounting: how to apply
  • Understand risk exposures and their effects on financial statements

evaluate the risks exposed to

how do you want to manage

hedge accounting how to apply1
Hedge Accounting: how to apply

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

hedge accounting how to apply2
Hedge Accounting: how to apply
  • 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)

hedge accounting how to apply3
Hedge Accounting: how to apply

4. Discontinue hedge accounting

inneffective or terminated

(prospective basis)

hedge accounting how to apply4
Hedge Accounting: how to apply

5. Provide disclosure

Company’s objectives and strategy

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

further readings
Further readings
  • 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
frs 132 presentation disclosure
FRS 132 : Presentation & Disclosure
  • Presentation (132:15)
  • financial assets, liability or equity
  • in accordance with the substance of the contract and definition of the above groups
frs 132 presentation disclosure1
FRS 132 : Presentation & Disclosure
  • Disclosure

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

ifrs 7 disclosures
IFRS 7 : Disclosures
  • 70 additional disclosure requirements

Criteria used to classify

Capital management strategy

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