ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
currency exchange risk associated with the forecast purchases in yen, the effects of
exchange rate changes between the Australian dollar and the yen will affect the
Australian entity’s surplus or deficit and, therefore, would also affect consolidated
surplus or deficit. IPSAS 29 does not require that the operating unit that is exposed
to the risk being hedged be a party to the hedging instrument.
F.2.15 Internal Contracts: Single Offsetting External Derivative
An entity uses what it describes as internal derivative contracts to document the
transfer of responsibility for interest rate risk exposures from individual
divisions to a central treasury function. The central treasury function
aggregates the internal derivative contracts and enters into a single external
derivative contract that offsets the internal derivative contracts on a net basis.
For example, if the central treasury function has entered into three internal
receive-fixed, pay-variable interest rate swaps that lay off the exposure to
variable interest cash flows on variable rate liabilities in other divisions and one
internal receive-variable, pay-fixed interest rate swap that lays off the exposure
to variable interest cash flows on variable rate assets in another division, it
would enter into an interest rate swap with an external counterparty that
exactly offsets the four internal swaps. Assuming that the hedge accounting
criteria are met, in the entity’s financial statements would the single offsetting
external derivative qualify as a hedging instrument in a hedge of a part of the
underlying items on a gross basis?
Yes, but only to the extent the external derivative is designated as an offset of cash
inflows or cash outflows on a gross basis. IPSAS 29.94 indicates that a hedge of an
overall net position does not qualify for hedge accounting. However, it does permit
designating a part of the underlying items as the hedged position on a gross basis.
Therefore, even though the purpose of entering into the external derivative was to
offset internal derivative contracts on a net basis, hedge accounting is permitted if
the hedging relationship is defined and documented as a hedge of a part of the
underlying cash inflows or cash outflows on a gross basis. An entity follows the
approach outlined in IPSAS 29.94 and IPSAS 29.AG141 to designate part of the
underlying cash flows as the hedged position.
F.2.16 Internal Contracts: External Derivative Contracts that are
Settled Net
Issue (a) – An entity uses internal derivative contracts to transfer interest rate
risk exposures from individual divisions to a central treasury function. For each
internal derivative contract, the central treasury function enters into a
derivative contract with a single external counterparty that offsets the internal
derivative contract. For example, if the central treasury function has entered
into a receive-5 percent-fixed, pay-LIBOR interest rate swap with another
division that has entered into the internal contract with central treasury to
hedge the exposure to variability in interest cash flows on a pay-LIBOR
borrowing, central treasury would enter into a pay-5 percent-fixed, receive-
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IPSAS 29 IMPLEMENTATION GUIDANCE
PUBLIC SECTOR