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 />
if the objective of the hedge is to obtain the forward coupon rate that existed at the<br />
inception of the hedge, the swap is effective, <strong>and</strong> the comparison based on differences in<br />
forward interest rates suggests ineffectiveness when none may exist. Computing<br />
ineffectiveness based on the difference between the forward interest rates that existed at<br />
the inception of the hedge <strong>and</strong> the forward rates that exist at the effectiveness<br />
<strong>measurement</strong> date would be an appropriate <strong>measurement</strong> of ineffectiveness if the hedging<br />
objective is to lock in those forward interest rates. In that case, the appropriate hedging<br />
instrument would be a series of forward contracts each of which matures on a repricing<br />
date that corresponds with the date of the forecast transactions.<br />
It also should be noted that it would be inappropriate to compare only the variable cash<br />
flows on the interest rate swap with the interest cash flows in the debt that would be<br />
generated by the forward interest rates. That methodology has the effect of measuring<br />
ineffectiveness only on a portion of the derivative, <strong>and</strong> IPSAS 29 does not permit the<br />
bifurcation of a derivative for the purposes of assessing effectiveness in this situation<br />
(IPSAS 29.83). It is recognized, however, that if the fixed interest rate on the interest rate<br />
swap is equal to the fixed rate that would have been obtained on the debt at inception,<br />
there will be no ineffectiveness assuming that there are no differences in terms <strong>and</strong> no<br />
change in credit risk or it is not designated in the hedging relationship.<br />
F.5.6 Cash Flow Hedges: Firm Commitment to Purchase Property,<br />
Plant <strong>and</strong> Equipment in a Foreign Currency<br />
Entity A has the Local Currency (LC) as its functional currency <strong>and</strong><br />
presentation currency. On June 30, 20X1, it enters into a forward exchange<br />
contract to receive Foreign Currency (FC) 100,000 <strong>and</strong> deliver LC109,600 on<br />
June 30, 20X2 at an initial cost <strong>and</strong> fair value of zero. It designates the forward<br />
exchange contract as a hedging instrument in a cash flow hedge of a firm<br />
commitment to purchase spare parts for its electricity distribution network on<br />
March 31, 20X2 <strong>and</strong> the resulting payable of FC100,000, which is to be paid on<br />
June 30, 20X2. All hedge accounting conditions in IPSAS 29 are met.<br />
As indicated in the table below, on June 30, 20X1, the spot exchange rate is LC1.072<br />
to FC1, while the twelve-month forward exchange rate is LC1.096 to FC1. On<br />
December 31, 20X1, the spot exchange rate is LC1.080 to FC1, while the six-month<br />
forward exchange rate is LC1.092 to FC1. On March 31, 20X2, the spot exchange<br />
rate is LC1.074 to FC1, while the three-month forward rate is LC1.076 to FC1. On<br />
June 30, 20X2, the spot exchange rate is LC1.072 to FC1. The applicable yield curve<br />
in the local currency is flat at 6 percent per year throughout the period. The fair value<br />
of the forward exchange contract is negative LC388 on December 31, 20X1 {([1.092<br />
× 100,000] – 109,600)/1.06(6/12)}, negative LC1.971 on March 31, 20X2 {([1.076 ×<br />
100,000] – 109,600)/1.06((3/12))}, <strong>and</strong> negative LC2,400 on June 30, 20X2 {1.072<br />
× 100,000 – 109,600}.<br />
IPSAS 29 IMPLEMENTATION GUIDANCE 1240