ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
It is important to recognize that the swaps are not hedging the cash flow risk for a
single investment over its entire life. The swaps are designated as hedging the cash
flow risk from different principal investments and repricings that are made in each
repricing period of the swaps over their entire term. The swaps hedge only the
interest accruals that occur in the first period following the reinvestment. They are
hedging the cash flow impact resulting from a change in interest rates that occurs up
to the repricing of the swap. The exposure to changes in rates for the period from the
repricing of the swap to the date of the hedged reinvestment of cash inflows or
repricing of variable rate assets is not hedged. When the swap is repriced, the interest
rate on the swap is fixed until the next repricing date and the accrual of the net swap
settlements is determined. Any changes in interest rates after that date that affect the
amount of the interest cash inflow are no longer hedged for accounting purposes.
Designation Objectives
Systems Considerations
Many of the tracking and bookkeeping requirements are eliminated by designating each
repricing of an interest rate swap as hedging the cash flow risk from forecast
reinvestments of cash inflows and repricings of variable rate assets for only a portion of
the lives of the related assets. Much tracking and bookkeeping would be necessary if the
swaps were instead designated as hedging the cash flow risk from forecast principal
investments and repricings of variable rate assets over the entire lives of these assets.
This type of designation avoids keeping track of gains and losses recognized in net
assets/equity after the forecast transactions occur (IPSAS 29.108 and IPSAS 29.109)
because the portion of the cash flow risk being hedged is that portion that will be
recognized in surplus or deficit in the period immediately following the forecast
transactions that corresponds with the periodic net cash settlements on the swap. If
the hedge were to cover the entire life of the assets being acquired, it would be
necessary to associate a specific interest rate swap with the asset being acquired. If a
forecast transaction is the acquisition of a fixed rate instrument, the fair value of the
swap that hedged that transaction would be recognized in surplus or deficit to adjust
the interest revenue on the asset when the interest revenue is recognized. The swap
would then have to be terminated or redesignated in another hedging relationship. If
a forecast transaction is the acquisition of a variable rate asset, the swap would
continue in the hedging relationship but it would have to be tracked back to the asset
acquired so that any fair value amounts on the swap recognized in net assets/equity
could be recognized in surplus or deficit upon the subsequent sale of the asset.
It also avoids the necessity of associating with variable rate assets any portion of the
fair value of the swaps that is recognized in net assets/equity. Accordingly, there is
no portion of the fair value of the swap that is recognized in net assets/equity that
should be recognized in surplus or deficit when a forecast transaction occurs or upon
the sale of a variable rate asset.
IPSAS 29 IMPLEMENTATION GUIDANCE 1264