Accounting for Derivatives. Ramirez Juan
Чтение книги онлайн.
Читать онлайн книгу Accounting for Derivatives - Ramirez Juan страница 9
Название: Accounting for Derivatives
Автор: Ramirez Juan
Издательство: Автор
Жанр: Зарубежная образовательная литература
isbn: 9781118817964
isbn:
The recognition of the hedged item is as follows:
• If the hedged item is measured at amortised cost or a debt instrument at FVOCI, the hedging gain or loss on the hedged item adjusts the carrying amount of the hedged item (if applicable) and is recognised in profit or loss. The adjustment of the carrying amount is amortised to profit or loss. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for hedging gains and losses. In theory the amortisation is based on a recalculation of the effective interest rate for the hedged item. In practice, to ease the administrative burden of amortising the adjustment while the hedged item continues to be adjusted for changes in fair value attributable to the hedged risk, it may be easier to defer amortising the adjustment until the hedged item ceases to be adjusted for the designated hedged risk. An entity must apply the same amortisation policy for all of its debt instruments. In other words, an entity cannot defer amortising on some items and not on others.
• If the hedged item is an equity instrument at FVOCI, the hedging gain or loss on the hedged item shall remain in OCI.
• If the hedged item is an unrecognised firm commitment (or a component thereof), the subsequent cumulative change in the fair value of the unrecognised firm commitment attributable to the hedged risk is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss. If the firm commitment is to acquire an asset or assume a liability, the initial carrying amount of the asset or liability that results from the entity meeting the firm commitment is adjusted to include the cumulative change in the fair value of the commitment attributable to the hedged risk that was recognised in the statement of financial position.
A hedge of the FX risk of a firm commitment may be accounted for as a fair value hedge or a cash flow hedge.
A cash flow hedge is a hedge of the exposure to variability in cash flows that:
• is attributable to a particular risk associated with all, or a component, of a recognised asset or liability (such as all or some future interest payments on variable rate debt), or a highly probable forecast transaction; and
• could affect reported profit or loss.
A hedge of the FX risk of a firm commitment may be accounted for as a fair value hedge or as a cash flow hedge.
Effective and Ineffective Parts
The change in the hedging instrument fair value is split into two components (see Figure 2.2): an effective and an ineffective part.
Figure 2.2 Recognition of effective and ineffective parts of the change in fair value of a hedging instrument.
The effective part represents the portion that is offset by a change in fair value of the hedged item and is calculated as the lower of the following (in absolute amounts):
• the cumulative gain or loss on the hedging instrument from inception of the hedge; and
• the cumulative change in fair value (present value) of the hedged item (i.e., the present value of the cumulative change in the hedged expected future cash flows) from inception of the hedge.
The ineffective part represents the hedge ineffectiveness, or in other words, the portion of the change in fair value of the hedging instrument that has not been offset by a change in fair value of the hedged item. It is calculated as the difference between the cumulative change in fair value of the hedging instrument and its effective part.
The ineffective part includes specific components excluded, as documented in the entity's risk management strategy, from the assessment of hedge effectiveness. Common sources of ineffectiveness for a cash flow hedge are (i) the time value of an option or the forward points of a forward or the foreign currency basis spread included in the hedging relationship (this situation is quite unusual as commonly these elements are excluded from the hedging relationship), (ii) structured derivative features embedded in the hedging instrument, (iii) changes in timing of the highly probable forecast transaction, (iv) credit/debit valuation adjustments and (v) differences between the risk being hedged and the underlying of the hedging instrument.
Accounting Recognition of the Effective and Ineffective Parts
The recognition of the change in fair value of the hedging instrument is as follows:
• The effective portion of the gain or loss on the hedging instrument is recognised directly in a separate reserve in OCI –the “cash flow hedge reserve”.
• The ineffective portion of the fair value movement on the hedging instrument is recorded immediately in profit or loss.
THE TEMPTATION TO UNDERHEDGE
An entity may be tempted to “underhedge” its cash flow exposure to increase the likelihood that the cumulative change in fair value of the hedged instrument for the risk being hedged does not exceed the cumulative change in fair value of the hedged item for the risk being hedged, and consequently lessen the possibility of recording ineffectiveness. IFRS 9 precludes the voluntary use of underhedging by requiring a hedge ratio “that is the same as that resulting from actual amounts of hedged items and hedging instruments that the entity uses to hedge that quantity of hedged item to meet the risk management objective”.
An “underhedging” decision does not bring any benefits in a fair value hedge because both gains and losses on the hedged item and the hedging instrument are recognised in profit or loss. Therefore, both the effective part and the ineffective part would be recorded in profit or loss.
The amount that has been accumulated in the cash flow hedge reserve of OCI is reclassified, or “recycled”, as follows (see Figure 2.3):
• If the hedged item is a forecast transaction that will result in the recognition of a non-financial asset or non-financial liability (e.g., a purchase of raw material or inventory), or a firm commitment, the entity removes the amount from the cash flow hedge reserve and includes it directly in the initial cost or other carrying amount of the asset or the liability (e.g., within “inventories”).
• For cash flow hedges other than those covered in the previous paragraph, the amount that has been accumulated in the cash flow hedge reserve of OCI is reclassified to profit or loss in the same period or periods during which the hedged expected future cash flows affect profit or loss, therefore offsetting to the extent that the hedge is effective. For example, if the hedged item is a variable rate borrowing, the reclassification to profit or loss is recognised in profit or loss within “finance costs”, therefore offsetting the borrowing's interest cost. To take another example, if the hedged item is an export sale, the reclassification to profit or loss is recognised in the profit or loss statement within “sales”, therefore adjusting the revenue amount.
• If the amount accumulated in the cash flow hedge reserve of OCI is a loss and the entity expects that all or a portion of that loss will not be recovered in one or more future periods, it immediately reclassifies the amount that is not expected to be recovered into profit or loss in the same way as in the previous paragraph.
