ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
question would be reported in the IPSAS 30.25 disclosures separately for each type
of hedge.
F.1.13 Hedging Instrument: Dual Foreign Currency Forward Exchange
Contract
Entity A’s functional currency is the Japanese yen. Entity A has a five-year
floating rate US dollar liability and a ten-year fixed rate pound sterlingdenominated
note receivable. The principal amounts of the asset and liability
when converted into the Japanese yen are the same. Entity A enters into a single
foreign currency forward contract to hedge its foreign currency exposure on
both instruments under which it receives US dollars and pays pounds sterling at
the end of five years. If Entity A designates the forward exchange contract as a
hedging instrument in a cash flow hedge against the foreign currency exposure
on the principal repayments of both instruments, can it qualify for hedge
accounting?
Yes. IPSAS 29.85 permits designating a single hedging instrument as a hedge of
multiple types of risk if three conditions are met. In this example, the derivative
hedging instrument satisfies all of these conditions, as follows.
(a) The risks hedged can be identified clearly. The risks are the exposures to changes
in the exchange rates between US dollars and yen, and yen and pounds,
respectively.
(b) The effectiveness of the hedge can be demonstrated. For the pound sterling
loan, the effectiveness is measured as the degree of offset between the fair
value of the principal repayment in pounds sterling and the fair value of the
pound sterling payment on the forward exchange contract. For the US dollar
liability, the effectiveness is measured as the degree of offset between the fair
value of the principal repayment in US dollars and the US dollar receipt on
the forward exchange contract. Even though the receivable has a ten-year life
and the forward protects it for only the first five years, hedge accounting is
permitted for only a portion of the exposure as described in Question F.2.17.
(c) It is possible to ensure that there is specific designation of the hedging instrument
and different risk positions. The hedged exposures are identified as the principal
amounts of the liability and the note receivable in their respective currency of
denomination.
F.1.14 Concurrent Offsetting Swaps and Use of One as a Hedging
Instrument
Entity A enters into an interest rate swap and designates it as a hedge of the fair
value exposure associated with fixed rate debt. The fair value hedge meets the
hedge accounting criteria of IPSAS 29. Entity A simultaneously enters into a
second interest rate swap with the same swap counterparty that has terms that
fully offset the first interest rate swap. Is Entity A required to view the two
IPSAS 29 IMPLEMENTATION GUIDANCE 1212