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HEDGE ACCOUNTING
(RELEVANT EXTRACT – IAS 39)
Presented By: CA. NIRMAL GHORAWAT
B. Com (Hons), ACA, cIFRS(ICAI)
INTRODUCTION – HEDGE ACCOUNTING
2
Accounting
Mismatch
RecognitionMeasureme
nt
Timing Differences
Hedged Item is
not yet
Recognised
Hedged Item is
not Measured at
Fair Value
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 FV of Hedged Item
FV of Hedging Instrument
IAS 39
3 May 2013Presented By: CA. Nirmal Ghorawat
HEDGE ACCOUNTING - DEFINITIONS
3
Hedged Item an Asset, Liability, Firm Commitment, Highly probable forecast
transaction or Net Investment in Foreign Operation THAT:
(a) Exposes the entity to RISK of changes in Fair Value or
Cash Flows and (b) is DESIGNATED as being hedged.
Hedging
Instrument
is DESIGNATED (a) a Derivative or (b) a Non-Derivative FA or
FL (for a hedge of risk of changes in foreign currency rates
only) – whose Fair Value or Cash Flows are expected to offset
changes in Fair Value or Cash Flows of a Designated Hedged
Item.
Hedge
Effectiveness
the DEGREE to which changes in Fair Value or Cash Flows of
the Designated Hedged Item Attributable to Hedged Risk are
to offset by changes in Fair Value or Cash Flows of a
Designated Hedged Instrument.
Firm
Commitment
Binding Agreement – to Exchange – Specified Resource –
Specified Price - Specified Future Date(s).
Forecast
Transaction
An uncommitted but Anticipated Future transaction.
IAS 39
3 May 2013Compiled By: CA. Nirmal Ghorawat
HEDGE ACCOUNTING
4
What can Qualify as a Hedging Instrument?
AG
IAS 39
AG
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
3 May 2013Compiled By: CA. Nirmal Ghorawat
HEDGE ACCOUNTING
5
What can Qualify as a Hedged Item?
AG
IAS 39
AG
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
3 May 2013Compiled By: CA. Nirmal Ghorawat
HEDGE ACCOUNTING
6
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
IAS 39
Forex Credit Equity Interest Commodity
Fair Value Cash FlowsProbable Future
Cash Flows
3 May 2013Compiled By: CA. Nirmal Ghorawat
TYPES OF HEDGES
7
� Fair value hedges� Hedge of exposure to changes in fair value of a recognised
asset or liability; an unrecognised firm commitment; or anidentified portion of any of the above two;
� that is attributable to a particular risk; and
� would affect P&L.
� Cash flow hedgesHedge of exposure to variability in cash flows that is:
� attributable to a particular risk associated with a recognisedasset or liability or a highly probable forecast transaction (alsoan 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.
IAS 39
3 May 2013Compiled By: CA. Nirmal Ghorawat
CONDITIONS FOR HEDGE ACCOUNTING
8
� Formal Documentation atInception
� Entity’s Risk ManagementObjective and Strategy
� Formal Designation of HedgingRelationship by Identification of
� Hedging Instrument
� Related Hedged Item orTransaction
� Nature of Risk being Hedged
� How the Entity will assess theHedging Instrument’sEFFECTIVENESS.
IAS 39
3 May 2013Compiled By: CA. Nirmal Ghorawat
CONDITIONS FOR HEDGE ACCOUNTING
9
� 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.
IAS 39
3 May 2013Compiled By: CA. Nirmal Ghorawat
HEDGE EFFECTIVENESS
10
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%
125 %
100 %
80 %
Ineffectiveness to P & L
Ineffectiveness to P & L
Discontinue Hedge Accounting
Discontinue Hedge Accounting
IAS 39
3 May 2013Compiled By: CA. Nirmal Ghorawat
HEDGE ACCOUNTING – FAIR VALUE
11
Measurement of
Hedged Item
Measurement of
Hedging Instrument
Without Hedge
Accounting
At Amortised Cost Or
At Fair Value through
Equity (OCI)
At Fair Value
through P & L.
With Hedge
Accounting
Adjust the Carrying
Amount to Fair Value
through P & L.
At Fair Value
through P & L.
� 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.
IAS 39MEASUREMENT MISMATCH
RECOGNITION OF GAINS & LOSSES ON HEDGED ITEM AT FAIR
VALUE THROUGH P & L.
3 May 2013Compiled By: CA. Nirmal Ghorawat
12
HEDGE ACCOUNTING – FAIR VALUE
IAS 39MECHANICS
Change in Fair
Value of Hedged
Item
P & L
Changes in Fair Value of Hedging Instrument
P & L P & L
Effective Ineffective
3 May 2013Compiled By: CA. Nirmal Ghorawat
HEDGE ACCOUNTING – CASH FLOW
13
Measurement of
Hedged Item
Measurement of
Hedging Instrument
Without Hedge
Accounting
Not yet Recognised in
Accounts
At Fair Value
through P & L.
With Hedge
Accounting
Not yet Recognised in
Accounts
At Fair Value
through OCI.
� 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.
IAS 39RECOGNITION MISMATCH
DEFER RECOGNITION OF GAINS & LOSSES ON HEDGING
INSTRUMENT
3 May 2013Compiled By: CA. Nirmal Ghorawat
14
HEDGE ACCOUNTING – CASH FLOW
IAS 39MECHANICS
Change in Fair
Value of Hedged
Item
Not Recognised
Changes in Fair Value of Hedging Instrument
OCI (Equity) P & L
Effective Ineffective
Recycled when Hedged
Item affects Earnings
3 May 2013Compiled By: CA. Nirmal Ghorawat
HEDGE ACCOUNTING – NIFO
15
Measurement of
Hedged Item
Measurement of
Hedging Instrument
Without Hedge
Accounting
Fair Value through
Equity (OCI)
At Fair Value
through P & L.
With Hedge
Accounting
Fair Value through
Equity (OCI)
At Fair Value
through OCI.
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.
IAS 39RECOGNITION MISMATCH
MATCH RECOGNITION IN EQUITY OF GAINS & LOSSES ON
HEDGING INSTRUMENT
3 May 2013Compiled By: CA. Nirmal Ghorawat
16
HEDGE ACCOUNTING – NIFO
IAS 39MECHANICS
Change in Fair
Value of Hedged
Item
OCI (Equity)
Changes in Fair Value of Hedging Instrument
OCI (Equity) P & L
Effective Ineffective
Recycled on Disposal of Foreign
Operation
3 May 2013Compiled By: CA. Nirmal Ghorawat
DISCONTINUATION OF HEDGE ACCOUNTING
17
� 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
IAS 39
Fair Value Hedge Cash Flow Hedge
Future Changes in FV
of
Hedging
Instrument
P & L P & L
Hedged Item As per Applicable IAS
(as if Not Hedged)
N/A
Amount Recognised
till Date in Equity
N/A Transfer to P & L
3 May 2013Compiled By: CA. Nirmal Ghorawat
18 3 May 2013Compiled By: CA. Nirmal Ghorawat