ipsas 29—financial instruments: recognition and measurement - IFAC

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FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT B’s entries Dr Payables LC5 Cr Foreign exchange gain LC5 Dr Internal loss TC LC5 Cr Internal contract TC LC5 Dr Net assets/equity LC50 Cr Internal contract TC LC50 TC’s entries Dr Internal loss A LC10 Cr Internal contract A LC10 Dr Internal loss A LC20 Cr Internal contract A LC20 Dr Internal contract B LC5 Cr Internal gain B LC5 Dr Internal contract B LC50 Cr Internal gain B LC50 Dr Foreign exchange loss LC25 Cr External forward contract LC25 TOTAL (for the internal derivatives) A B Total 1205 LC LC TC Surplus or deficit (fair value hedges) 10 (5) 5 Net assets/equity (cash flow hedges) 20 (50) (30) Total 30 (55) (25) Combining these amounts with the external transactions (i.e., those not marked in italics above) produces the total net balances before elimination of the internal derivatives as follows: Debit Credit Receivables – LC10 Payables LC5 – Forward contract – LC25 Net assets/equity LC30 – Gains and losses – – Internal contracts – – For the consolidated financial statements, the following designations are made at the beginning of month 1: IPSAS 29 IMPLEMENTATION GUIDANCE PUBLIC SECTOR
FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT • The payable of FC50 in B is designated as a hedge of the first FC50 of the highly probable future revenues in A. Therefore, at the end of month 1, the following entries are made in the consolidated financial statements: Dr Payable LC5; Cr Net assets/equity LC5; • The receivable of FC100 in A is designated as a hedge of the first FC100 of the highly probable future expenses in B. Therefore, at the end of month 1, the following entries are made in the consolidated financial statements: Dr Net assets/equity LC10; Cr Receivable LC10; and • The external forward contract on FC250 in TC is designated as a hedge of the next FC250 of highly probable future expenses in B. Therefore, at the end of month 1, the following entries are made in the consolidated financial statements: Dr Net assets/equity LC25; Cr External forward contract LC25. In the consolidated financial statements at the end of month 1, IPSAS 29 requires the accounting effects of the internal derivative transactions to be eliminated. However, the total net balances before and after elimination of the accounting entries relating to the internal derivatives are the same, as set out below. Accordingly, there is no need to make any further accounting entries to meet the requirements of IPSAS 29. IPSAS 29 IMPLEMENTATION GUIDANCE 1206 Debit Credit Receivables – LC10 Payables LC5 – Forward contract – LC25 Net assets/equity LC30 – Gains and losses – – Internal contracts – – Case 4: Offset of Fair Value and Cash Flow Hedges with Adjustment to Carrying Amount of Inventory Assume similar transactions as in case 3, except that the anticipated cash outflow of FC500 in B relates to the purchase of inventory that is delivered after 60 days. Assume also that the entity has a policy of basis-adjusting hedged forecast nonfinancial items. At the end of month 2, there are no further changes in exchange rates or fair values. At that date, the inventory is delivered and the loss of LC50 on B’s internal derivative, recognized in net assets/equity in month 1, is adjusted against the carrying amount of inventory in B. The gain of LC20 on A’s internal derivative is recognized in net assets/equity as before. In the consolidated financial statements, there is now a mismatch compared with the result that would have been achieved by unwinding and redesignating the hedges. The external derivative (FC250) and a proportion of the receivable (FC50) offset FC300 of the anticipated inventory purchase. There is a natural hedge between the
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IPSAS 29—FINANCIAL INSTRUMENTS: R
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FINANCIAL INSTRUMENTS: RECOGNITION
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Introduction FINANCIAL INSTRUMENTS:
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ipsas 29—financial instruments: recognition and measurement - IFAC

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