ias 39 hedge accounting

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


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


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


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


� 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

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


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


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


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


IAS 39MEASUREMENT MISMATCH

RECOGNITION OF GAINS & LOSSES ON HEDGED ITEM AT FAIR

VALUE THROUGH P & L.


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


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


IAS 39RECOGNITION MISMATCH

DEFER RECOGNITION OF GAINS & LOSSES ON HEDGING

INSTRUMENT


14

HEDGE ACCOUNTING – CASH FLOW

IAS 39MECHANICS

Change in Fair

Value of Hedged

Item

Not Recognised


OCI (Equity) P & L


Recycled when Hedged

Item affects Earnings


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


16

HEDGE ACCOUNTING – NIFO

IAS 39MECHANICS

Change in Fair

Value of Hedged

Item

OCI (Equity)


OCI (Equity) P & L


Recycled on Disposal of Foreign

Operation


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


18 3 May 2013Compiled By: CA. Nirmal Ghorawat

ias 39 hedge accounting

Economy & Finance