ipsas 29—financial instruments: recognition and measurement - IFAC
ipsas 29—financial instruments: recognition and measurement - IFAC
ipsas 29—financial instruments: recognition and measurement - IFAC
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT<br />
also to a hedge of the exposure to cash flow risk associated with the forecast future<br />
interest receipts on debt <strong>instruments</strong> resulting from the reinvestment of interest<br />
receipts on a fixed rate asset classified as held to maturity.<br />
F.2.12 Hedge Accounting: Prepayable Financial Asset<br />
If the issuer has the right to prepay a financial asset, can the investor designate<br />
the cash flows after the prepayment date as part of the hedged item?<br />
Cash flows after the prepayment date may be designated as the hedged item to the<br />
extent it can be demonstrated that they are “highly probable” (IPSAS 29.98). For<br />
example, cash flows after the prepayment date may qualify as highly probable if they<br />
result from a group or pool of similar assets (e.g., mortgage loans) for which<br />
prepayments can be estimated with a high degree of accuracy or if the prepayment<br />
option is significantly out of the money. In addition, the cash flows after the<br />
prepayment date may be designated as the hedged item if a comparable option exists<br />
in the hedging instrument.<br />
F.2.13 Fair Value Hedge: Risk That Could Affect Surplus or Deficit<br />
Is fair value hedge accounting permitted for exposure to interest rate risk in<br />
fixed rate loans that are classified as loans <strong>and</strong> receivables?<br />
Yes. Under IPSAS 29, loans <strong>and</strong> receivables are carried at amortized cost. Many<br />
entities hold the bulk of their loans <strong>and</strong> receivables until maturity. Thus, changes in<br />
the fair value of such loans <strong>and</strong> receivables that are due to changes in market interest<br />
rates will not affect surplus or deficit. IPSAS 29.96 specifies that a fair value hedge<br />
is a hedge of the exposure to changes in fair value that is attributable to a particular<br />
risk <strong>and</strong> that can affect surplus or deficit. Therefore, IPSAS 29.96 may appear to<br />
preclude fair value hedge accounting for loans <strong>and</strong> receivables. However, it follows<br />
from IPSAS 29.88 that loans <strong>and</strong> receivables can be hedged items with respect to<br />
interest rate risk since they are not designated as held-to-maturity investments. The<br />
entity could sell them <strong>and</strong> the change in fair values would affect surplus or deficit.<br />
Thus, fair value hedge accounting is permitted for loans <strong>and</strong> receivables.<br />
F.2.14 Intragroup <strong>and</strong> Intra-entity Hedging Transactions<br />
An Australian entity, whose functional currency is the Australian dollar, has<br />
forecast purchases in Japanese yen that are highly probable. The Australian<br />
entity is wholly owned by a Swiss entity, which prepares consolidated financial<br />
statements (which include the Australian subsidiary) in Swiss francs. The Swiss<br />
controlling entity enters into a forward contract to hedge the change in yen<br />
relative to the Australian dollar. Can that hedge qualify for hedge accounting in<br />
the consolidated financial statements, or must the Australian controlled that has<br />
the foreign currency exposure be a party to the hedging transaction?<br />
The hedge can qualify for hedge accounting provided the other hedge accounting<br />
criteria in IPSAS 29 are met. Since the Australian entity did not hedge the foreign<br />
IPSAS 29 IMPLEMENTATION GUIDANCE 1218