Ias 32 39 financial instruments disclosure and presentation recognition and measurement up date
Download
1 / 77

IAS 32/39 Financial Instruments: Disclosure and Presentation Recognition and Measurement UP-DATE - PowerPoint PPT Presentation


  • 439 Views
  • Updated On :

IAS 32/39 Financial Instruments: Disclosure and Presentation Recognition and Measurement UP-DATE. Agenda. Scope and definitions IAS 32 Liability and equity Offsetting a financial asset and financial liability IAS 39 Classification of financial instruments

Related searches for IAS 32/39 Financial Instruments: Disclosure and Presentation Recognition and Measurement UP-DATE

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'IAS 32/39 Financial Instruments: Disclosure and Presentation Recognition and Measurement UP-DATE' - tea


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

Agenda l.jpg
Agenda

  • Scope and definitions

  • IAS 32

    • Liability and equity

    • Offsetting a financial asset and financial liability

  • IAS 39

    • Classification of financial instruments

    • Measurement of financial assets and liabilities

    • Derivatives and embedded derivatives

    • Recognition and derecognition

    • Hedging and hedge accounting

  • IAS 32 – Disclosure requirements




Definition what is a financial instrument l.jpg
Definition : What is a Financial Instrument?

and

A contract that gives rise to:

Financial Asset

in one enterprise

Financial Liability or

Equity Instrument

in another enterprise


Types of financial instruments l.jpg
Types of Financial Instruments

Financial Instruments

Combinations

  • Convertible debt

  • Exchangeable debt

  • Dual currency bond

Primary

  • Deposits of cash

  • Bonds, loans, borrowings

  • Receivables / payables (including finance leases)

  • Equity instruments

Derivatives

  • Forwards / futures

  • Financial options

  • Swaps

  • Caps and collars

  • Financial guarantees

  • Letters of credit



Ias 32 presentation8 l.jpg
IAS 32 – Presentation

  • Liability and equity

  • Offsetting a financial asset and a financial liability


Ias 32 liability and equity l.jpg
IAS 32 – Liability and Equity

  • Classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.

  • If a financial instrument contains both a liability and an equity element, the instrument’s component parts should be classified separately.

  • Debt Securities with an embedded conversion option, such as a convertible bond, should be separated into the liability component and the equity component on the balance sheet.


Ias 32 liability and equity10 l.jpg
IAS 32 – Liability and Equity

Liability

  • Contractual obligation to deliver cash or another financial asset.

    • Mandatory redeemable preference shares.

    • A “puttable instrument” by the holder.

  • Liability if the obligation is conditional.

    • Conditional upon approval by regulatory authority.

    • Conditional upon the counter-party exercising its right to redeem.


Ias 32 liability and equity11 l.jpg
IAS 32 – Liability and Equity

  • Settlement in the entity’s own equity instrument.

    • Not an equity instrument solely because settlement is through delivery or receipt of the entity’s own equity.

    • Liability if the contractual obligation is a fixed amount so that the value of the equity instrument equals the amount of contractual obligation.

  • Settlement options

    • When a derivative financial instrument gives one party a choice over how it is settled (eg. the issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is a financial asset or a financial liability unless all settlement alternatives would result in it being an equity instrument.


Ias 32 liability and equity12 l.jpg
IAS 32 – Liability and Equity

  • Contingent settlement provision

    • Liability if the obligation to deliver cash or another financial instrument arises only on the occurrence or non-occurrence of uncertain future events that are beyond the control of both the issuer and holder, unless

      • The contingent event is restricted only in the event of liquidation of the issuer; or

      • The contingent event that trigger the obligation is considered to be not genuine.


Ias 32 liability and equity13 l.jpg
IAS 32 – Liability and Equity

  • Treasury Shares

    • Acquisition of own equity instruments (treasury shares) should be deducted from equity. No gain or loss shall be recognised in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments.

    • However, an obligation to purchase own equity instruments for cash or another financial asset gives rise to a financial liability for the present value of the redemption amount.


Ias 32 liability and equity14 l.jpg
IAS 32 – Liability and Equity

  • Compound Instrument

    • An financial instrument that contains both liability and equity components should be classified and presented separately.

    • Example: A bond that is convertible, either mandatory or at the option of the holder into equity shares of the issuer.

  • Method of separating the liability and equity component

    • The liability component is fair valued first, and this provides the initial carrying amount of the liability component.

    • The fair value of the liability component is then deducted from the fair value of the instrument with the residual amount representing the equity component.

    • Transaction costs are usually allocated to the liability and equity components based on proportion of fair value.


Ias 32 liability and equity15 l.jpg
IAS 32 – Liability and Equity

  • Interest, Dividends, Losses and Gains

    • Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability shall be recognised as income or expense in profit and loss.

    • Distributions to holders of an equity instrument shall be debited by the entity directly to equity.


Ias 32 offsetting of a financial asset and a financial liability l.jpg
IAS 32 – Offsetting of a financial asset and a financial liability

  • A financial asset and a financial liability shall be offset and the net amount presented in the balance sheet when, and only when, an entity:

    • Currently has a legally enforceable right to set off the recognised amounts; and

    • Intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.


Ias 39 classification of financial assets and liabilities l.jpg

IAS 39 liabilityClassification of Financial Assets and Liabilities


Classification of financial assets l.jpg
Classification of Financial Assets liability

Financial Assets

At fair value thru P&L

( NEW )

Held-to-maturity

Available-for-sale

Loans and receivables

Designated upon initial recognition

Held for trading


Financial assets designated upon initial recognition l.jpg
Financial Assets : Designated upon initial recognition liability

  • Any financial asset or financial liability within the scope of this Standard may be designated when initially recognised as a financial asset or financial liability at fair value thru P&L;

    except for:

  • investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured.

    Note: There is a limit to the types of financial assets and financial liabilities to which this option may be applied.


Financial assets held to maturity l.jpg
Financial Assets : Held-to-Maturity liability

Assets with fixed or determinable payments and fixed maturity:

  • which the enterprise has the positive intent and ability to hold to maturity

    other than

  • loans and receivables; and

  • those that the entity upon initial recognition designates as at fair value through profit & loss or those that the entity designates as available for sale.


Slide21 l.jpg

Financial Assets : Held-to-Maturity (Continued) liability

An enterprise should not classify any financial assets as held-to-maturity if it (IAS 39R.9):

  • sold, transferred or exercised put options on more than an insignificant amount of held-to-maturity investments before maturity during the current year or two preceding years (TAINTING)

    OTHER THAN

  • sales close enough to maturity or the exercised call date so that interest rate changes did not have significant effect on fair value;

  • sales after the enterprise has already collected substantially all of the financial asset’s original principal; or

  • sales due to an isolated event that is beyond the enterprise’s control, is non-recurring and could not have been reasonably anticipated.


Classification of financial liabilities l.jpg
Classification of Financial Liabilities liability

Financial liabilities

At fair value thru P&L

That arise when a transfer of a financial asset does not qualify for de-recognition or is accounted for using the continuing involvement approach

REPOS &/OR SALE OF ASSETS W RECOURSE

Others

Held for trading

Designated upon initial recognition*

* Precluded from reclassifying into or out of this category


Financial liabilities at fair value thru p l l.jpg
Financial Liabilities : At fair value thru P&L liability

Comprises

a) Financial liabilities held for trading:

  • derivative liabilities that are not hedging instruments

  • the obligation to deliver securities borrowed by a short seller (an enterprise that sells securities that it does not yet own)

  • Financial liabilities that are incurred with an intention to repurchase them in the near term ( NEW )

  • Financial liabilities that are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking

    b) Designated as “fair value thru P/L” upon initial recognition

    The fact that a liability is used to fund trading activities does not make that liability one held for trading


Ias 39 measurement of financial assets and liabilities l.jpg

IAS 39 liabilityMeasurement of Financial Assets and Liabilities


Initial measurement l.jpg
Initial Measurement liability

Financial asset or financial liability

is initially recognised

at fair value

Financial assets/ liabilities at fair value thru P&L

Held-to-maturity financial asset/ liabilities

plus transaction costs

Loans and receivables

Transaction costs:

  • on purchase are included

  • that may be incurred on disposal are excluded

  • Are directly attributable to the acquisition/ issue of the financial asset/ liability

  • ( NEW )

Available for sale financial assets


Initial measurement26 l.jpg
Initial Measurement liability

On initial recognition:

  • financial assets and financial liabilities should be measured at fair value, PLUS

  • in the case of financial assets / liabilities not at fair value thru P&L, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.( NEW )


Initial measurement27 l.jpg
Initial Measurement liability

  • The fair value of a financial instrument on initial recognition is normally the transaction price.

  • However, if part of the consideration given or received is for something other than the financial instrument, the fair value is estimated using a valuation technique.


Initial measurement28 l.jpg
Initial Measurement liability

  • The fair value of a long-term loan that carried no interest can be estimated as the PV of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument (similar as to currency, term, type of interest rate and other factors) with a similar credit rating. ( APPLICABLE TO DEBT RESTRUCTURING OR COMMERCIAL TRANSACTIONS )

  • The fair value of a financial liability with a demand feature (e.g. a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.


Subsequent measurement financial assets l.jpg
Subsequent Measurement : Financial Assets liability

Financial assets

are subsequently recognised

at amortised cost

Loans and receivables

Held-to-maturity investments

at fair value

Available-for- sale securities

At fair value thru P&L

at cost

Unquoted equity instruments and related derivatives


Slide30 l.jpg

Subsequent Measurement : liabilityLoans and Receivables

2. Loans and Receivables : Cost or Amortised Cost

Created by the enterprise by providing money, goods, or services directly to a debtor, other than those intended for sale in the short term

Examples: receivables from sales of goods, originated mortgage loans, credit card loans, government or corporate securities acquired at origination

Gain/loss from amortization is recognised in net profit/loss


Slide31 l.jpg

Subsequent Measurement : liabilityFair Value thru Profit and Loss

3. Fair value thru profit and loss : Fair Value

  • Acquired or incurred principally for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin;

    OR

  • Part of a portfolio with a recent pattern of short-term profit-taking;

    OR

  • Designated upon initial recognition.

    Examples: trading portfolio of marketable securities, all derivatives unless qualifying as a hedge

    Gain/loss from fair value changes is recognised in net profit/loss


Slide32 l.jpg

Subsequent Measurement : liabilityAvailable-for-Sale

4. Available-for-Sale : Fair value

Financial assets which are designated as available for sale ornot in one of the other three categories.

Example: equities not held for trading, including strategic investments; debt securities with no positive intent/ability to hold to maturity

Gain/loss from fair value changes is recognised directly in equity until sold, collected, disposed, at which time include in profit or loss.

( NEW )

Interest calculated using effective interest rate method is recognised in the P&L.


Slide33 l.jpg

Subsequent Measurement: liabilityException from Fair Value Requirement

Presumption:

Fair value can be reliably determined for most financial assets classified as available for sale or held for trading.

But:

Presumption can be overcome for:

  • investment in equity instrument that does not have a quoted market price in an active market and for which other methods of estimating fair value are clearly inappropriate/unworkable


Subsequent measurement impairment l.jpg

PW: liability

Subsequent Measurement : Impairment

  • At each balance sheet date, the enterprise should assess whether there is any objective evidence of impairment (eg. financial difficulty of issuer, breach of contract, historical pattern of non-collectibility etc).

  • If any evidence exists, the enterprise should provide for any impairment to recoverable amount for debt instruments (ie. the present value of expected future cash flows discounted at the financial instrument’s original effective interest rate) or to their estimated fair values (for equity instruments).


Slide35 l.jpg

Subsequent Measurement : Impairment liability

  • Assess existence of any objective evidence of impairment:

    • significant financial difficulty of issuer

    • actual breach of contract such as failure to make interest/principal payments

    • high probability of bankruptcy

    • disappearance of active market for financial asset

    • historical pattern indicating entire face value of portfolio will not be collected

  • Discount expected future cash flows at original effective interest rate to determine recoverable amount.

  • Write down to recoverable amount through net profit/loss.

  • Impairment loss for financial assets carried at cost (unquoted equity) should not be reversed. ( NEW )

  • Impairment loss for available for sale equity instrument cannot be reversed thru P&L, any subsequent increase in fair value is recognized in equity.( NEW )


Subsequent measurement financial liabilities l.jpg
Subsequent Measurement: Financial Liabilities liability

Financial liabilities

are subsequently recognized

All derivative liabilities except those linked to unquoted equity instrument

at amortized cost

at fair value

Transfers that do not qualify for de-recognition

Those designated at fair value thru P&L

Those continuing involvement in transferred asset, which is at amortized cost

Those arising from a continuing involvement in transferred asset, which is at fair value

All other financial liabilities

(eg. trade payable, bank loan)


Ias 39 derivatives and embedded derivatives l.jpg

IAS 39 liabilityDerivatives and Embedded Derivatives


Derivatives definition and classification l.jpg

Derivatives: liabilityDefinition and Classification


Definition of derivatives l.jpg
Definition of Derivatives liability

A derivative is a financial instrument:

a) whose value changes in response to the change in a specified underlying;

b) that requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; AND

c) that is settled at a future date.


Definition of derivatives response to changes in underlyings l.jpg
Definition of Derivatives : liabilityResponse to Changes in Underlyings

A financial instrument whose value changes in response to the change in a specified underlying:

  • Underlyings are defined as:

    • specified interest rate

    • security price

    • commodity price

    • foreign exchange rate

    • index of prices or rates

    • a credit rating or credit index

    • other variables


Definition of derivatives examples l.jpg
Definition of Derivatives: Examples liability

Type of Contract

1) Interest Rate Swap

2) Currency Swap

3) Commodity Swap

4) Equity Swap

5) Credit Swap

6) Purchased/written Treasury

Bond Option (call/put)

7) Purchased/written Currency

Bond Option (call/put)

8) Purchased/written

Commodity Option (call/put)

Underlying Variable

Interest Rates

Currency Rates

Commodity Prices

Equity Prices (equity of another enterprise)

Credit Rating, Credit index or Credit price

Interest Rate

Currency Rates

Commodity Prices


Definition of derivatives examples continued l.jpg
Definition of Derivatives : Examples (Continued) liability

Underlying Variable

Equity Prices (equity of another Enterprise)

Interest Rates

Currency Rates

Commodity Prices

Currency Rates

Commodity Prices

Equity Prices (equity of another enterprise)

Type of Contract

9) Purchased / written Stock

Option (call / put)

10) Interest Rate Futures

Linked to Government

Debt (Treasury Futures)

11) Currency Futures

12) Commodity Futures

13) Currency Forward

14) Commodity Forward

15) Equity Forward


Classification of derivatives l.jpg
Classification of Derivatives liability

Derivatives

Instruments held for trading

Hedging instruments

Assets held for trading

Liabilities held for trading


Embedded derivatives definition and treatment l.jpg

Embedded Derivatives: liabilityDefinition and Treatment


Definition e mbedded derivatives l.jpg
Definition : E liabilitymbedded Derivatives

  • A component of a hybrid instrument that combines the derivative and a host contract

  • Example : Convertible bond

    • host contract = the bond

    • embedded derivative = call option on share

Should you separate out the embedded and account for the two elements separately?


Embedded derivatives evaluating when to separate from a host contract l.jpg
Embedded Derivatives: liabilityEvaluating When to Separate from a Host Contract

* to the embedded derivative

Is the contract

carried at fair

value through

earnings?

Would it be a

derivative if it

were freestanding?

Is it

closely related

to the host

contract?

Apply IAS 39*

No

Yes

No

Yes

No

Yes

Do Not Apply IAS 39*


Embedded derivatives not closely related examples l.jpg
Embedded Derivatives: liability“Not Closely Related” - Examples

  • Asset linked bond: Debt host + credit derivative based on performance of asset

  • FX sales contract: Euro sales contract + foreign exchange swap (where currency in which contract is denominated is not functional currency of either party or currency in which commodity is generally traded)


Embedded derivatives what are the consequences of separation l.jpg

If separated: liability

Host contract: apply applicable IAS

Derivative: apply IAS 39 ie. fair value the derivative and it may qualify as a hedging instrument

If not required to separate:

Apply applicable IAS to the combined contract

If required to separate, but unable to measure the derivative:

The combined contract is treated as a financial instrument held for trading, carried at fair value, and does not qualify for hedge accounting

Embedded Derivatives:What are the Consequences of Separation?


Embedded derivatives impact of separation l.jpg
Embedded Derivatives : liabilityImpact of Separation

How should the initial carrying amounts of a host and embedded derivative be determined if separation is required?

Initial Carrying = Cost for the Hybrid - Fair Value of Embedded

Amount of Host Instrument Derivative

Note: More than one embedded derivative may be separated from a host contract provided that they represent different risks.


Ias 39 recognition l.jpg

IAS 39 liabilityRecognition


Recognition l.jpg
Recognition liability

  • An enterprise should recognise a financial asset or a financial liability on its balance sheet when, and only when, it becomes a party to the contractual provisions of the instrument.

  • Consequence:

    • An enterprise recognizes all of its contractual rights or obligations under derivative contracts in its balance sheet as assets or liabilities


Ias 39 derecognition l.jpg

IAS 39 liabilityDerecognition


Ias 39 derecognition53 l.jpg
IAS 39: Derecognition liability

  • Provides guidance/conditions on derecognition of financial assets/liabilities.

  • Applicable to:

    • Securitisation transactions.

    • Debts/receivables factoring.

    • Refinancing of loans.


Slide54 l.jpg

IASB liabilityDecision Tree

Consolidate all subsidiaries (including any SPE) [Paragraph 15]

Consolidate all subsidiaries (including any SPE) [Paragraph 15]

Determine whether the derecognition principles below are applied to a part or all of an asset (or group of similar assets) [Paragraph 16]

Has the entity transferred its contractual rights to receive the cash flows from the asset? [Paragraph 18(a)]

Yes

No

No

Has the entity assumed an obligation to pay the cash flows from the asset that meets the conditions in paragraph 19? [Paragraph 18(b)]

Continue to recognise the asset

Yes

Has the entity transferred substantially all risks and rewards? [Paragraph 20(a)]

Derecognise the asset

Yes

No

Yes

Has the entity retained substantially all risks and rewards? [Paragraph 20(b)]

Continue to recognise the asset

No

No

Has the entity retained control of the asset?[Paragraph 20(c)]

Derecognise the asset

Yes

Continue to recognise the asset to the extent of the entity’s continuing involvement


Ias 39 derecognition of financial assets l.jpg
IAS 39: Derecognition of Financial assets liability

De-recognize a financial asset when and only when:

Primary Condition - Transfer of Assets

  • Contractual rights to the cash flows expire; or

  • Entity transfers the financial assets

    • Transfers the contractual rights to receive cash flows; or

    • Retains the contractual rights to receive cash flows, but assumes a contractual obligation to pay cash flows to eventual recipients ( Para 18.b) In such case, if and only if, all of the following conditions are met ( Para.19 )

      • Entity is not obligated to pay amounts to eventual recipients unless it collects equivalent amounts from the original asset;

      • Entity is prohibited from selling/pledging the original asset other than as security

      • Entity is obligated to remit any cash flows it collects on behalf of the eventual recipients without material delay.


Ias 39 de recognition transfers of financial asset l.jpg
IAS 39: De-recognition - transfers of financial asset liability

Secondary Condition – Significant

  • Qualify for de-recognition if the entity:

    • Has transferred substantially all the risks and rewards of ownership; or

    • Has not retained control of the asset, in the case if entity has neither transferred nor retained substantially all the risks and rewards of ownership

  • Do not qualify for de-recognition if the entity:

    • Has retained substantially all the risks and rewards of ownership; or

    • Has retained control of the asset, in the case if entity has neither transferred nor retained substantially all the risks and rewards of ownership (also known as continuing involvement)


Ias 39 derecognition of financial liabilities l.jpg
IAS 39: Derecognition of liabilityFinancial Liabilities

expired

discharged

released

  • A financial liability should be removed from the balance sheet when, and only when, it is

    extinguished


Derecognition financial liabilities l.jpg
Derecognition : liabilityFinancial Liabilities

  • The conditions for de-recognition are met when either:

    (i) the debtor discharges the liability by paying the creditor, normally with cash, other financial assets, goods, or services; or

    (ii) the debtor is legally released from primary responsibility for the

    liability (or part thereof) either by process of law or by the

    creditor (the fact that the debtor may have given a guarantee

    does not necessarily mean that this condition is not met).

  • The condition is not met when payment is made to a third party (in substance defeasance) unless there is legal release of the debtor’s obligation to the creditor.


Derecognition financial liabilities59 l.jpg
Derecognition : liabilityFinancial Liabilities

  • An exchange between an existing borrower and lender of debt instruments with substantially different terms/modification of terms should be accounted for as an extinguishment of the original financial liability and the recognition of new liability.

  • The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate is at least 10% different from the discounted PV of the remaining cash flows of the original liability.

  • If accounted as extinguishment, any costs and fees incurred are recognised as part of the gain or loss on the extinguishment.

  • If not accounted as extinguishment, any costs or fees incurred adjust the carrying value of the liability and are amortised over the remaining term of the modified liability.


Ias 39 hedging and hedge accounting l.jpg

IAS 39 liabilityHedging and Hedge Accounting


Hedging definitions l.jpg
Hedging : Definitions liability

Hedgingfor accounting purposes means designating one or more hedging instruments so that their change in fair value is an offset, in whole or in part, to the change in fair value or cash flows of a hedged item.

Hedge effectiveness is the degree to which offsetting changes in fair value or cash flows attributable to a hedged risk are achieved by the hedging instrument.


Hedged item definition l.jpg
Hedged Item : Definition liability

A hedged item is an asset, liability, firm commitment, or forecasted future transaction that :

  • exposes the enterprise to risk of changes in fair value or changes in future cash flows;

    and that

  • for hedge accounting purposes, is designated as being hedged.


Hedged item what items can be hedged l.jpg

Recognised assets and liabilities - eg. bonds, loans liability

Unrecognised firm commitments - eg. lease rentals, firm contracts

Highly probable future transactions - eg. future sales and purchases

A net investment in a foreign operation

Hedged Item : What Items Can Be Hedged?


Hedging permitted hedging strategies l.jpg
Hedging : Permitted Hedging Strategies liability

  • Transaction based hedging: single risk (ie. foreign exchange or interest rate risk) hedged by a single hedging instrument

  • Single hedging instrument hedging more than one identifiable type of risk (eg. cross-currency interest rate swaps)

  • Portfolios of assets or liabilities which share the same risk exposure

  • Combinations of hedging instruments (provided that they only offset the risks of the hedged items)


Hedge accounting what conditions are necessary l.jpg
Hedge Accounting : What Conditions Are Necessary? liability

  • Formal documentation (hedging relationship and risk management objectives and strategy)

  • Hedge is expected to be highly effective

  • Effectiveness of the hedge can be measured and is assessed on an ongoing basis throughout the financial reporting period

  • Hedged forecasted transactions must be highly probable and must present an exposure to variations in cash flows that ultimately affect reported net profit or loss


Hedge accounting documentation requirements l.jpg
Hedge Accounting : Documentation Requirements liability

The hedging documentation dealing with hedges against particular risks should be formal and include the following elements:

  • nature of hedging relationship

  • risk management objective and strategy for undertaking hedge

  • identification of the hedging instrument

  • identification of the related hedged item or transaction

  • the nature of the risk being hedged (particular risk)

  • description of how the enterprise will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or the hedged transaction’s cash flows that is attributable to the hedged risk.


Hedge accounting assessing hedge effectiveness l.jpg
Hedge Accounting : Assessing Hedge Effectiveness liability

  • A hedge is highly effective if

changes in the fair value or cash flows of the hedging instrument

changes in fair value or cash flows of the hedged item

HIGHLY

OFFSET

  • Initial expectation must be that they “almost fully offset”

  • Actual offsetting within a range of 80% to 125% is acceptable

  • Method of assessing hedge effectiveness depends on the documented risk management strategy

  • No single method for assessing hedge effectiveness is prescribed, but time value of money should be considered



Hedge accounting types of hedging relationships l.jpg
Hedge Accounting : liabilityTypes of Hedging Relationships

FAIR VALUE

CASH FLOW

INVESTMENT IN

FOREIGN ENTITY

HEDGING

RELATIONSHIPS


Ias 39 hedges l.jpg
IAS 39: Hedges liability

Floating-Rate Assets FX-Denominated Fixed-Rate Assets

Floating-Rate Liabilities Firm commitments Fixed-Rate Liabilities

Forecasted Transactions Firm Commitments

FX-Denominated FX-Denominated

Forecasted Transactions Securities

FX-Denominated

Receivables/Payables

Net Investments in Foreign Operations (IAS 21)

Fair

Value

Hedges

Cash

Flow

Hedges

Foreign

Currency

Hedges


Hedge accounting types of hedging relationships71 l.jpg
Hedge Accounting : liabilityTypes of Hedging Relationships

1. Fair value hedge - hedge of the variability of changes in fair value of a recognised asset or liability or a firm commitment ( previously cash flow hedge )

(e.g. an interest rate swap that hedges the risk that the fair value of a fixed rate bond will fluctuate, or a hedge of a firm commitment to buy an asset at a fixed price)

2. Cash flow hedge - hedge of exposure to variability in cash flowson a recognized asset or liability, or a forecasted transaction

(e.g.. an interest rate swap that hedges the risk that the cash flows on a variable rate bond will fluctuate, or a hedge of a forecasted purchase /sale of asset)

3. Hedge of a net investment in foreign operations (IAS 21)


Definition of a fair value hedge l.jpg
Definition of a Fair Value Hedge liability

A fair value hedge is:

“a hedge of the exposure to changes in the fair value of a recognized asset or liability or a firm commitment, or an identified portion of such an asset or liability, that is attributable to a particular risk and that will affect reported net income”

Key issues:

  • hedged asset or liability must be recognized on balance sheet

  • hedged risk must give rise to a risk of changes in fair value of hedged asset or liability


Slide73 l.jpg

Definition of a liabilityCash Flow Hedge

Cash flow hedge:

a hedge of the exposure to variability in cash flows that:

  • is attributable to a particular risk associated with a recognized assetor liability (such as all or some future interest payments on variable rate debt) or a forecasted transaction (such as an anticipated purchase or sale) and that

  • will affect reported net profit or loss.


Hedge of a firm commitment l.jpg
Hedge of a Firm Commitment liability

A hedge of a firm commitment:

  • Represents a fair value exposure

    Except for

  • A hedge of the foreign currency risk of a firm commitment which could be accounted for as a fair value hedge or as a cash flows hedge.


Hedge accounting hedges of a net investment in a foreign operations l.jpg
Hedge accounting: liabilityHedges of a Net Investment in a Foreign Operations

Hedges of net investments in a foreign operations, including a hedge of a monetary item that is accounted for as part of the net investment, should be accounted for in the same way as cash flow hedges:

  • the portion of the gain or loss on the hedging instrument that is effective should be recognized in equity

  • the ineffective portion should be reported immediately in net profit or loss

  • The effective portion’s gain / loss recognized in equity should be recognized in profit or lossupon disposal of foreign operations


Hedge accounting summary l.jpg
Hedge Accounting - Summary liability

  • Hedge accounting is a privilege not a right

  • Designation and documentation are essential prior to beginning hedge accounting

  • Common hedging strategies, including macro hedging and use of internal derivatives, may not be permitted

  • Only derivatives can be designated as hedging instruments other than for foreign exchange risk, where non-derivative instruments can be used

  • Hedge accounting is available for recognized assets and liabilities, firm commitments and forecasted transactions



ad