ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
This type of designation also permits flexibility in deciding how to reinvest cash flows
when they occur. Since the hedged risk relates only to a single period that corresponds
with the repricing period of the interest rate swap designated as the hedging instrument, it
is not necessary to determine at the designation date whether the cash flows will be
reinvested in fixed rate or variable rate assets or to specify at the date of designation the
life of the asset to be acquired.
Effectiveness Considerations
Ineffectiveness is greatly reduced by designating a specific portion of the cash flow
exposure as being hedged.
• Ineffectiveness due to credit differences between the interest rate swap and hedged
forecast cash flow is eliminated by designating the cash flow risk being hedged as
the risk attributable to changes in the interest rates that correspond with the rates
inherent in the swap, such as the AA rate curve. This type of designation prevents
changes resulting from changes in credit spreads from being considered as
ineffectiveness.
• Ineffectiveness due to duration differences between the interest rate swap and
hedged forecast cash flow is eliminated by designating the interest rate risk being
hedged as the risk relating to changes in the portion of the yield curve that
corresponds with the period in which the variable rate leg of the interest rate swap
is repriced.
• Ineffectiveness due to interest rate changes that occur between the repricing date
of the interest rate swap and the date of the forecast transactions is eliminated by
simply not hedging that period of time. The period from the repricing of the swap
and the occurrence of the forecast transactions in the period immediately
following the repricing of the swap is left unhedged. Therefore, the difference in
dates does not result in ineffectiveness.
Accounting Considerations
The ability to qualify for hedge accounting using the methodology described here is
founded on provisions in IPSAS 29 and on interpretations of its requirements. Some of
those are described in the answer to Question F.6.2 Hedge Accounting Considerations
when Interest Rate Risk is Managed on a Net Basis. Some additional and supporting
provisions and interpretations are identified below.
Hedging a Portion of the Risk Exposure
The ability to identify and hedge only a portion of the cash flow risk exposure resulting
from the reinvestment of cash flows or repricing of variable rate instruments is found in
IPSAS 29.90 as interpreted in the answers to Questions F.6.2 Issue (k) and F.2.17 Partial
Term Hedging.
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IPSAS 29 IMPLEMENTATION GUIDANCE
PUBLIC SECTOR