ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
asset and liability occur in the same period and the net cash flow is always
positive because the interest rate on the asset exceeds the interest rate on the
liability. The entity enters into an interest rate swap to receive a floating interest
rate and pay a fixed interest rate on a notional amount equal to the principal of
the asset and designates the interest rate swap as a fair value hedge of the fixed
rate asset. Does the hedging relationship qualify for hedge accounting even
though the effect of the interest rate swap on an entity-wide basis is to create an
exposure to interest rate changes that did not previously exist?
Yes. IPSAS 29 does not require risk reduction on an entity-wide basis as a condition
for hedge accounting. Exposure is assessed on a transaction basis and, in this
instance, the asset being hedged has a fair value exposure to interest rate increases
that is offset by the interest rate swap.
F.2.7 Cash Flow Hedge: Forecast Transaction Related to an Entity’s
Net Assets/Equity
Can a forecast transaction in the entity’s own equity instruments or forecast
dividend or similar payments to owners be designated as a hedged item in a
cash flow hedge?
No. To qualify as a hedged item, the forecast transaction must expose the entity to a
particular risk that can affect surplus or deficit (IPSAS 29.96). The classification of
financial instruments as liabilities or net assets/equity generally provides the basis for
determining whether transactions or other payments relating to such instruments are
recognized in surplus or deficit IPSAS 28. For example, distributions to holders of an
equity instrument are debited by the issuer directly to net assets/equity (IPSAS
28.40). Therefore, such distributions cannot be designated as a hedged item.
However, a declared dividend or similar distribution that has not yet been paid and is
recognized as a financial liability may qualify as a hedged item, for example, for
foreign currency risk if it is denominated in a foreign currency.
F.2.8 Hedge Accounting: Risk of a Transaction Not Occurring
Does IPSAS 29 permit an entity to apply hedge accounting to a hedge of the risk
that a transaction will not occur, for example, if that would result in less
revenue to the entity than expected?
No. The risk that a transaction will not occur is an overall operational risk that is not
eligible as a hedged item. Hedge accounting is permitted only for risks associated
with recognized assets and liabilities, firm commitments, highly probable forecast
transactions and net investments in foreign operations (IPSAS 29.96).
F.2.9 Held-to-Maturity Investments: Hedging Variable Interest Rate
Payments
Can an entity designate a pay-variable, receive-fixed interest rate swap as a
cash flow hedge of a variable rate, held-to-maturity investment?
IPSAS 29 IMPLEMENTATION GUIDANCE 1216