ipsas 29—financial instruments: recognition and measurement - IFAC
ipsas 29—financial instruments: recognition and measurement - IFAC
ipsas 29—financial instruments: recognition and measurement - IFAC
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FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT<br />
F.4.4 Hedge Effectiveness: Effectiveness Tests<br />
How should hedge effectiveness be measured for the purposes of initially<br />
qualifying for hedge accounting <strong>and</strong> for continued qualification?<br />
IPSAS 29 does not provide specific guidance about how effectiveness tests are<br />
performed. IPSAS 29 specifies that a hedge is normally regarded as highly effective<br />
only if (a) at inception <strong>and</strong> in subsequent periods, the hedge is expected to be highly<br />
effective in achieving offsetting changes in fair value or cash flows attributable to the<br />
hedged risk during the period for which the hedge is designated, <strong>and</strong> (b) the actual<br />
results are within a range of 80–125 percent. IPSAS 29.AG145 also states that the<br />
expectation in (a) can be demonstrated in various ways.<br />
The appropriateness of a given method of assessing hedge effectiveness will depend on<br />
the nature of the risk being hedged <strong>and</strong> the type of hedging instrument used. The<br />
method of assessing effectiveness must be reasonable <strong>and</strong> consistent with other similar<br />
hedges unless different methods are explicitly justified. An entity is required to<br />
document at the inception of the hedge how effectiveness will be assessed <strong>and</strong> then to<br />
apply that effectiveness test on a consistent basis for the duration of the hedge.<br />
Several mathematical techniques can be used to measure hedge effectiveness,<br />
including ratio analysis, i.e., a comparison of hedging gains <strong>and</strong> losses with the<br />
corresponding gains <strong>and</strong> losses on the hedged item at a point in time, <strong>and</strong> statistical<br />
<strong>measurement</strong> techniques such as regression analysis. If regression analysis is used,<br />
the entity’s documented policies for assessing effectiveness must specify how the<br />
results of the regression will be assessed.<br />
F.4.5 Hedge Effectiveness: Less than 100 Percent Offset<br />
If a cash flow hedge is regarded as highly effective because the actual risk offset is<br />
within the allowed 80–125 percent range of deviation from full offset, is the gain<br />
or loss on the ineffective portion of the hedge recognized in net assets/equity?<br />
No. IPSAS 29.106(a) indicates that only the effective portion is recognized in net<br />
assets/equity. IPSAS 29.106(b) requires the ineffective portion to be recognized in<br />
surplus or deficit.<br />
F.4.6 Assuming Perfect Hedge Effectiveness<br />
If the principal terms of the hedging instrument <strong>and</strong> of the entire hedged asset<br />
or liability or hedged forecast transaction are the same, can an entity assume<br />
perfect hedge effectiveness without further effectiveness testing?<br />
No. IPSAS 29.98(e) requires an entity to assess hedges on an ongoing basis for<br />
hedge effectiveness. It cannot assume hedge effectiveness even if the principal terms<br />
of the hedging instrument <strong>and</strong> the hedged item are the same, since hedge<br />
ineffectiveness may arise because of other attributes such as the liquidity of the<br />
<strong>instruments</strong> or their credit risk (IPSAS 29.AG150). It may, however, designate only<br />
certain risks in an overall exposure as being hedged <strong>and</strong> thereby improve the<br />
1229<br />
IPSAS 29 IMPLEMENTATION GUIDANCE<br />
PUBLIC SECTOR