CA. NIRMAL GHORAWAT B. Com (Hons), ACA 1

INTRODUCTION – HEDGE ACCOUNTING 2 Accounting Mismatch Recognition Measurement Timing Differences Hedged Item is not yet Recognised Hedged Item is not Measured at Fair Value Hedge Accounting seeks to ELIMINATE these Accounting Mismatch. It recognises the OFFSETTING EFFECTS on P & L of Changes in Fair Value of the Hedging Instrument and the Hedged Item Hedged Item Hedging Instrument IAS 39

HEDGE ACCOUNTING - DEFINITIONS 3 Hedged Iteman Asset, Liability, Firm Commitment, Highly probable forecast transaction or Net Investment in Foreign Operation THAT: (a) Exposes the entity to RISK of changes in Fair Value or Cash Flows and (b) is DESIGNATED as being hedged. Hedging Instrument is DESIGNATED (a) a Derivative or (b) a Non-Derivative FA or FL (for a hedge of risk of changes in foreign currency rates only) – whose Fair Value or Cash Flows are expected to offset changes in Fair Value or Cash Flows of a Designated Hedged Item. Hedge Effectiveness the DEGREE to which changes in Fair Value or Cash Flows of the Designated Hedged Item Attributable to Hedged Risk are to offset by changes in Fair Value or Cash Flows of a Designated Hedged Instrument. Firm Commitment Binding Agreement – to Exchange – Specified Resource – Specified Price - Specified Future Date(s). Forecast Transaction An uncommitted but Anticipated Future transaction. IAS 39

HEDGE ACCOUNTING 4 What can Qualify as a Hedging Instrument? IAS 39 AG Purchased Options An HTM Investment for Foreign Currency Risk Written Options Entity’s own equity instruments AFS Investment in Unquoted Equity Share not carried at Fair Value Stock Index

HEDGE ACCOUNTING 5 What can Qualify as a Hedged Item? IAS 39 AG An Exposure to a risk that affects the Income Statement An AFS Security A Loan / Receivable Foreign currency monetary item A HTM Investment for interest rate risk An Investment in Associate or Subsidiary Non financial asset or Liability A general business Risk Derivative

HEDGE ACCOUNTING 6 Types of Risk which can be Hedged Exposure to these Risk can arise from changes in IAS 39 recognises 3 types of Hedge Relationship 1.Fair Value Hedge II.Cash Flow Hedge III.Hedge of Net Investment in Foreign Operation IAS 39 ForexCreditEquityInterestCommodity Fair ValueCash Flows Probable Future Cash Flows

TYPES OF HEDGES 7  Fair value hedges  Hedge of exposure to changes in fair value of a recognised asset or liability; an unrecognised firm commitment; or an identified portion of any of the above two;  that is attributable to a particular risk; and  would affect P&L.  Cash flow hedges Hedge of exposure to variability in cash flows that is:  attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (also an inter- company one); and  would affect P&L.  Hedge of a Net Investment in Foreign Operation  The Net Investment in Foreign Operation is the amount of a reporting entity’s interest in the net assets of that operation. IAS 39

CONDITIONS FOR HEDGE ACCOUNTING 8  Formal Documentation at Inception  Entity’s Risk Management Objective and Strategy  Formal Designation of Hedging Relationship by Identification of  Hedging Instrument  Related Hedged Item or Transaction  Nature of Risk being Hedged  How the Entity will assess the Hedging Instrument’s EFFECTIVENESS.  Hedge Effectiveness – The Hedge should be expected to be Highly Effective in achieving offsetting changes in Fair Value or Cash Flow attributable to the hedged risk – At Inception and subsequent periods.  Hedge Effectiveness – can be Reliably measured. IAS 39

HEDGE EFFECTIVENESS 9 Prospective Assessment  At Inception and throughout the life of Hedge  Testing Methods eg. Regression Analysis  Range of 80% - 125% Retrospective Assessment  At each Reporting Date and throughout the life of Hedge  Testing Methods eg. Regression Analysis, etc.  Range of 80% - 125% 125 % 100 % 80 % Ineffectiveness to P & L Discontinue Hedge Accounting IAS 39

HEDGE ACCOUNTING – FAIR VALUE 10 Measurement of Hedged Item Measurement of Hedging Instrument Without Hedge Accounting At Amortised Cost Or At Fair Value through Equity (OCI) At Fair Value through P & L. With Hedge Accounting Adjust the Carrying Amount to Fair Value through P & L. At Fair Value through P & L.  Fair value hedges  Hedge of exposure to changes in fair value of a recognised asset or liability; an unrecognised firm commitment; or an identified portion of any of the above two;  that is attributable to a particular risk; and  would affect P&L. IAS 39 MEASUREMENT MISMATCH RECOGNITION OF GAINS & LOSSES ON HEDGED ITEM AT FAIR VALUE THROUGH P & L.

11 HEDGE ACCOUNTING – FAIR VALUE IAS 39 MECHANICS Change in Fair Value of Hedged Item P & L Changes in Fair Value of Hedging Instrument P & L EffectiveIneffective

HEDGE ACCOUNTING – CASH FLOW 12  Hedge of exposure to variability in cash flows that is:  attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (also an inter-company one); and  would affect P&L. IAS 39 RECOGNITION MISMATCH DEFER RECOGNITION OF GAINS & LOSSES ON HEDGING INSTRUMENT

13 HEDGE ACCOUNTING – CASH FLOW IAS 39 MECHANICS Change in Fair Value of Hedged Item Not Recognised Changes in Fair Value of Hedging Instrument OCI (Equity) P & L Effective Ineffective Recycled when Hedged Item affects Earnings

HEDGE ACCOUNTING – NIFO 14 Hedge of a Net Investment in Foreign Operation The Net Investment in Foreign Operation is the amount of a reporting entity’s interest in the net assets of that operation. IAS 39 RECOGNITION MISMATCH MATCH RECOGNITION IN EQUITY OF GAINS & LOSSES ON HEDGING INSTRUMENT

15 HEDGE ACCOUNTING – NIFO IAS 39 MECHANICS Change in Fair Value of Hedged Item OCI (Equity) Changes in Fair Value of Hedging Instrument OCI (Equity) P & L Effective Ineffective Recycled on Disposal of Foreign Operation

DISCONTINUATION OF HEDGE ACCOUNTING 16  Prospective Discontinuation IF::  Hedging Instrument expires, is sold, terminated or exercised.  Hedge no longer meets the criteria for Hedge Accounting.  The entity revokes the Designation.  On Discontinuation IAS 39 Fair Value HedgeCash Flow Hedge Future Changes in FV of Hedging InstrumentP & L Hedged ItemAs per Applicable IAS (as if Not Hedged) N/A Amount Recognised till Date in Equity N/ATransfer to P & L

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