ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
aggregate fair value of such assets is less than their carrying amount, should the
aggregate net loss that has been recognized in net assets/equity be recognized in
surplus or deficit?
Not necessarily. The relevant criterion is not whether the aggregate fair value is less
than the carrying amount, but whether there is objective evidence that a financial
asset or group of assets is impaired. An entity assesses at the end of each reporting
period whether there is any objective evidence that a financial asset or group of
assets may be impaired, in accordance with IPSAS 29.68–70. IPSAS 29.69 states
that a downgrade of an entity’s credit rating is not, of itself, evidence of impairment,
although it may be evidence of impairment when considered with other available
information. Additionally, a decline in the fair value of a financial asset below its
cost or amortized cost is not necessarily evidence of impairment (e.g., a decline in
the fair value of an investment in a debt instrument that results from an increase in
the basic, risk-free interest rate).
Section F: Hedging
F.1 Hedging Instruments
F.1.1 Hedging the Fair Value Exposure of a Bond Denominated in a
Foreign Currency
Entity J, whose functional currency is the Japanese yen, has issued 5 million
five-year US dollar fixed rate debt. Also, it owns a 5 million five-year fixed rate
US dollar bond which it has classified as available for sale. Can Entity J
designate its US dollar liability as a hedging instrument in a fair value hedge of
the entire fair value exposure of its US dollar bond?
No. IPSAS 29.81 permits a non-derivative to be used as a hedging instrument only
for a hedge of a foreign currency risk. Entity J’s bond has a fair value exposure to
foreign currency and interest rate changes and credit risk.
Alternatively, can the US dollar liability be designated as a fair value hedge or
cash flow hedge of the foreign currency component of the bond?
Yes. However, hedge accounting is unnecessary because the amortized cost of the
hedging instrument and the hedged item are both remeasured using closing rates.
Regardless of whether Entity J designates the relationship as a cash flow hedge or a
fair value hedge, the effect on surplus or deficit is the same. Any gain or loss on the
non-derivative hedging instrument designated as a cash flow hedge is immediately
recognized in surplus or deficit to correspond with the recognition of the change in
spot rate on the hedged item in surplus or deficit as required by IPSAS 4.
F.1.2 Hedging with a Non-Derivative Financial Asset or Liability
Entity J’s functional currency is the Japanese yen. It has issued a fixed rate debt
instrument with semi-annual interest payments that matures in two years with
principal due at maturity of 5 million US dollars. It has also entered into a fixed
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IPSAS 29 IMPLEMENTATION GUIDANCE
PUBLIC SECTOR