ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
a cash flow hedge and the other is used in a fair value hedge, gains and losses
recognized would not offset since the gain (or loss) on the internal derivative used as
a fair value hedge would be recognized in surplus or deficit and the corresponding
loss (or gain) on the internal derivative used as a cash flow hedge would be
recognized in net assets/equity.
Question F.1.4 describes the application of IPSAS 29 to internal hedging transactions.
F.1.6 Offsetting Internal Derivative Contracts Used to Manage
Foreign Currency Risk
If a central treasury function enters into internal derivative contracts with
controlled entities and various divisions within the economic entity to manage
foreign currency risk on a centralized basis, can those contracts be used as a
basis for identifying external transactions that 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
by entering into a derivative contract with an external party?
It depends. IPSAS 6, “Consolidated and Separate Financial Statements” requires all
internal transactions to be eliminated in consolidated financial statements. As stated
in IPSAS 29.82, internal hedging transactions do not qualify for hedge accounting in
the consolidated financial statements of the economic entity. Therefore, if an entity
wishes to achieve hedge accounting in the consolidated financial statements, it must
designate a hedging relationship between a qualifying external hedging instrument
and a qualifying hedged item.
As discussed in Question F.1.5, the accounting effect of two or more internal
derivatives that are used to manage interest rate risk at the controlled entity or
division level and are offset at the treasury level is that the hedged non-derivative
exposures at those levels would be used to offset each other on consolidation. There
is no effect on surplus or deficit or net assets/equity if (a) the internal derivatives are
used in the same type of hedge relationship (i.e., fair value or cash flow hedges) and
(b), in the case of cash flow hedges, any derivative gains and losses that are initially
recognized in net assets/equity are recognized in surplus or deficit in the same
period(s). When these two conditions are met, the gains and losses on the internal
derivatives that are recognized in surplus or deficit or in net assets/equity will offset
on consolidation resulting in the same surplus or deficit and net assets/equity as if the
derivatives had been eliminated. 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, that would need to be eliminated. In
addition, there is an effect on surplus or deficit and net assets/equity if some of the
offsetting internal derivatives are used in cash flow hedges, while others are used in
fair value hedges. There is also an effect on surplus or deficit and net assets/equity
for offsetting internal derivatives that are used in cash flow hedges if the derivative
gains and losses that are initially recognized in net assets/equity are recognized in
IPSAS 29 IMPLEMENTATION GUIDANCE 1200