ca. nirmal ghorawat b. com (hons), aca 1. introduction – hedge accounting 2 accounting mismatch...
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HEDGE ACCOUNTING(RELEVANT EXTRACT – IAS 39)
CA. NIRMAL GHORAWAT
B. Com (Hons), ACA
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INTRODUCTION – HEDGE ACCOUNTING
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Accounting
Mismatch
Recognition
Measurement
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 ItemHedged ItemHedging Instrument
IAS 39
HEDGE ACCOUNTING - DEFINITIONS
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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
HEDGE ACCOUNTING
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What can Qualify as a Hedging Instrument?
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
HEDGE ACCOUNTING
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What can Qualify as a Hedged Item?
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
HEDGE ACCOUNTING
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Types of Risk which can be Hedged
Exposure to these Risk can arise from changes in
IAS 39 recognises 3 types of Hedge Relationship1. Fair Value HedgeII. Cash Flow HedgeIII. Hedge of Net Investment in Foreign Operation
IAS 39
Forex
Credit
Equity
Interest
Commodity
Fair Value
Cash
Flows
Probable
Future Cash Flows
TYPES OF HEDGES
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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 hedgesHedge 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.
IAS 39
CONDITIONS FOR HEDGE ACCOUNTING
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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.
IAS 39
HEDGE EFFECTIVENESS
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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
HEDGE ACCOUNTING – FAIR VALUE
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Measurement of Hedged Item
Measurement of Hedging
Instrument
Without Hedge Accounting
At Amortised Cost OrAt 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.
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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
HEDGE ACCOUNTING – CASH FLOW
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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
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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
HEDGE ACCOUNTING – NIFO
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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
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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
DISCONTINUATION OF HEDGE ACCOUNTING
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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
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