ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
F.1.5 Offsetting Internal Derivative Contracts Used to Manage
Interest Rate Risk
If a central treasury function enters into internal derivative contracts with
controlled entities and various divisions within the economic entity to manage
interest rate risk on a centralized basis, can those contracts qualify for hedge
accounting in the consolidated financial statements if, before laying off the risk,
the internal contracts are first netted against each other and only the net
exposure is offset in the marketplace with external derivative contracts?
No. An internal contract designated at the controlled entity level or by a division as a
hedge results in the recognition of changes in the fair value of the item being hedged
in surplus or deficit (a fair value hedge) or in the recognition of the changes in the
fair value of the internal derivative in net assets/equity (a cash flow hedge). There is
no basis for changing the measurement attribute of the item being hedged in a fair
value hedge unless the exposure is offset with an external derivative. There is also no
basis for recognizing the gain or loss on the internal derivative in net assets/equity
for one entity and recognizing it in surplus or deficit by the other entity unless it is
offset with an external derivative. In cases where two or more internal derivatives are
used to manage interest rate risk on assets or liabilities at the controlled entity or
division level and those internal derivatives are offset at the treasury level, the effect
of designating the internal derivatives as hedging instruments is that the hedged nonderivative
exposures at the controlled entity or division levels would be used to
offset each other on consolidation. Accordingly, since IPSAS 29.81 does not permit
designating non-derivatives as hedging instruments, except for foreign currency
exposures, the results of hedge accounting from the use of internal derivatives at the
controlled entity or division level that are not laid off with external parties must be
reversed on consolidation.
It should be noted, however, that there will be no effect on surplus or deficit and net
assets/equity of reversing the effect of hedge accounting in consolidation for internal
derivatives that offset each other at the consolidation level if they are used in the
same type of hedging relationship at the controlled entity or division level and, in the
case of cash flow hedges, where the hedged items affect surplus or deficit in the
same period. Just as the internal derivatives offset at the treasury level, their use as
fair value hedges by two separate entities or divisions within the consolidated group
will also result in the offset of the fair value amounts recognized in surplus or deficit,
and their use as cash flow hedges by two separate entities or divisions within the
economic entity will also result in the fair value amounts being offset against each
other in net assets/equity. However, there may be an effect on individual line items
in both the consolidated statement of changes in net assets/equity and the
consolidated statement of financial position, for example when internal derivatives
that hedge assets (or liabilities) in a fair value hedge are offset by internal derivatives
that are used as a fair value hedge of other assets (or liabilities) that are recognized in
a different line item in the statement of financial position or statement of changes in
net assets/equity. In addition, to the extent that one of the internal contracts is used as
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IPSAS 29 IMPLEMENTATION GUIDANCE
PUBLIC SECTOR