International Financial Reporting Standards_guide.pdf

Chapter 17 Financial Instruments: Recognition and Measurement (IAS 39) 203
17.4.19 Hedging means designating a derivative or nonderivative financial instrument as
an offset to the change in fair value or cash flows of a hedged item. A hedging relationship
qualifies for hedge accounting if the following criteria apply:
■ At the inception of the hedge, there is formal documentation setting out the hedge
details.
■ The hedge is expected to be highly effective (prospective effectiveness).
■ In the case of a forecasted transaction, the transaction must be highly probable.
■ The effectiveness of the hedge is reliably measured.
■ The hedge was effective throughout the period (retrospective effectiveness) (as described
in table 17.4).
17.4.20 Hedge accounting (see table 17.4) recognizes symmetrically the offsetting effects
on net profit or loss of changes in the fair values of the hedging instrument and the related
item being hedged. Hedging relationships are of three types:
1. Fair value hedge—hedges the exposure of a recognized asset or liability or an unrecognized
firm commitment (for example, changes in the fair value of fixed-rate bonds as a
result of changes in market interest rates).
2. Cash flow hedge—hedges the exposure to variability in cash flows related to a
recognized asset or liability (for example, future interest payments on a bond); or a
forecasted Transaction (for example, an anticipated purchase or sale of inventories).
3. Hedge of a net investment in a foreign operation—hedges the exposure related to
changes in foreign exchange rates.
17.4.21 The gain or loss on a fair value hedge should be recognized in net profit or loss,
and the loss or the gain from adjusting the carrying amount of the hedged item should be
recognized in net profit or loss. This applies even if the hedged item is accounted for at cost.
If the hedged item is an unrecognized firm commitment, the gain or loss should be recognized
as an asset or liability.
17.4.22 Profits and losses on cash flow hedges are treated as follows:
■ The portion of the gain or loss on the hedging instrument deemed to be an effective
hedge is recognized directly in other comprehensive income through the statement of
comprehensive income. The ineffective portion is reported in net profit or loss.
■ If the hedged forecasted transaction results in the recognition of a financial asset or liability,
the associated gain or loss previously recognized in other comprehensive income
should be recycled to profit or loss in the same period(s) that the asset or liability
affects profit or loss.
■ If the hedged forecasted transaction results in the recognition of a nonfinancial asset or
liability, then the entity has an accounting policy election to either include the gains or
loss previously recognized in other comprehensive income in the initial cost of the asset
or liability, or to recycle the asset or liability to profit or loss in the same period(s) that
the asset or liability affects profit or loss.
■ If the hedged forecast transaction is no longer expected to occur, the gain or loss previously
recognized in other comprehensive income is recycled.
■ For cash flow hedges that do not result in an asset or liability, the gain or loss in other
comprehensive income should be taken to profit or loss when the transaction occurs.
17.4.23 The portion of the profits and losses on hedges of a net investment in a foreign
entity on the hedging instrument deemed to be an effective hedge is recognized directly in
other comprehensive income through the statement of comprehensive income. The ineffective
portion is reported in net profit or loss.