ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
Yes, but only if there is a clear and identifiable exposure to changes in foreign exchange
rates. Therefore, hedge accounting is permitted if (a) the equity instrument is not traded
on an exchange (or in another established marketplace) where trades are denominated in
the same currency as the functional currency of Entity A and (b) dividends to Entity A
are not denominated in that currency. Thus, if a share is traded in multiple currencies and
one of those currencies is the functional currency of the reporting entity, hedge
accounting for the foreign currency component of the share price is not permitted.
If so, could the forward exchange contract be designated as a hedging
instrument in a hedge of the foreign exchange risk associated with the portion of
the fair value of the shares up to FC750 in foreign currency?
Yes. IPSAS 29 permits designating a portion of the cash flow or fair value of a financial
asset as the hedged item if effectiveness can be measured (IPSAS 29.90). Therefore,
Entity A may designate the forward exchange contract as a hedge of the foreign exchange
risk associated with only a portion of the fair value of the shares in foreign currency. It
could either be designated as a fair value hedge of the foreign exchange exposure of
FC750 associated with the shares or as a cash flow hedge of a forecast sale of the shares,
provided the timing of the sale is identified. Any variability in the fair value of the shares
in foreign currency would not affect the assessment of hedge effectiveness unless the fair
value of the shares in foreign currency was to fall below FC750.
F.2.20 Hedge Accounting: Stock Index
An entity may acquire a portfolio of shares to replicate a stock index and a put
option on the index to protect itself from fair value losses. Does IPSAS 29
permit designating the put on the stock index as a hedging instrument in a
hedge of the portfolio of shares?
No. If similar financial instruments are aggregated and hedged as a group, IPSAS 29.93
states that the change in fair value attributable to the hedged risk for each individual item
in the group is expected to be approximately proportional to the overall change in fair
value attributable to the hedged risk of the group. In the scenario above, the change in the
fair value attributable to the hedged risk for each individual item in the group (individual
share prices) is not expected to be approximately proportional to the overall change in
fair value attributable to the hedged risk of the group.
F.2.21 Hedge Accounting: Netting of Assets and Liabilities
May an entity group financial assets together with financial liabilities for the
purpose of determining the net cash flow exposure to be hedged for hedge
accounting purposes?
An entity’s hedging strategy and risk management practices may assess cash flow risk on
a net basis but IPSAS 29.94 does not permit designating a net cash flow exposure as a
hedged item for hedge accounting purposes. IPSAS 29.AG141 provides an example of
how an entity might assess its risk on a net basis (with similar assets and liabilities
grouped together) and then qualify for hedge accounting by hedging on a gross basis.
IPSAS 29 IMPLEMENTATION GUIDANCE 1222