ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
F.6 Hedges: Other Issues
F.6.1 Hedge Accounting: Management of Interest Rate Risk in Entities
Such as Departments of Finance
Entities, such as departments of finance, often manage their exposure to interest
rate risk on a net basis for all or parts of their activities. They have systems to
accumulate critical information throughout the entity about their financial
assets, financial liabilities and forward commitments, including loan
commitments. This information is used to estimate and aggregate cash flows
and to schedule such estimated cash flows into the applicable future periods in
which they are expected to be paid or received. The systems generate estimates
of cash flows based on the contractual terms of the instruments and other
factors, including estimates of prepayments and defaults. For risk management
purposes, many entities use derivative contracts to offset some or all exposure to
interest rate risk on a net basis.
If an entity manages interest rate risk on a net basis, can its activities potentially
qualify for hedge accounting under IPSAS 29?
Yes. However, to qualify for hedge accounting the derivative hedging instrument
that hedges the net position for risk management purposes must be designated for
accounting purposes as a hedge of a gross position related to assets, liabilities,
forecast cash inflows or forecast cash outflows giving rise to the net exposure
(IPSAS 29.94, IPSAS 29.AG141 and IPSAS 29.AG154). It is not possible to
designate a net position as a hedged item under IPSAS 29 because of the inability to
associate hedging gains and losses with a specific item being hedged and,
correspondingly, to determine objectively the period in which such gains and losses
should be recognized in surplus or deficit.
Hedging a net exposure to interest rate risk can often be defined and documented to
meet the qualifying criteria for hedge accounting in IPSAS 29.98 if the objective of
the activity is to offset a specific, identified and designated risk exposure that
ultimately affects the entity’s surplus or deficit (IPSAS 29.AG153) and the entity
designates and documents its interest rate risk exposure on a gross basis. Also, to
qualify for hedge accounting the information systems must capture sufficient
information about the amount and timing of cash flows and the effectiveness of the
risk management activities in accomplishing their objective.
The factors an entity must consider for hedge accounting purposes if it manages
interest rate risk on a net basis are discussed in Question F.6.2.
F.6.2 Hedge Accounting Considerations when Interest Rate Risk is
Managed on a Net Basis
If an entity manages its exposure to interest rate risk on a net basis, what are
the issues the entity should consider in defining and documenting its interest
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IPSAS 29 IMPLEMENTATION GUIDANCE
PUBLIC SECTOR