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Hello,
I would like to kindly ask you for explanation on the recognition of gain/loss on cashflow hedge accounting.
According to IAS 39 if the hedge is effective the gain/loss on the hedge instrument goes to OCI.
Ok, what about if it is ineffective? According to the article on ACCA webpage (https://www.accaglobal.com/gb/en/student/acca-qual-student-journey/qual-resource/acca-qualification/p2/technical-articles/hedge-accounting.html) in the example for cash flow hedge, there it is written:
“As an aside, sticking with the example that the hedging instrument reports a gain of $19m if we were to assume that the cost of the asset had only risen by $9.5m then the cash flow hedge would be 200% effective (19/9.5 = 200%) and therefore outside of the 80–125% effectiveness rule. The hedging relationship is not highly effective and therefore hedge accounting is not permitted. The whole $19m gain on the hedging instrument must therefore be recognised in the statement of profit or loss.”
So here everything goes directly to P&L.However, in BPP’s book I read: “The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge shall be recognised directly in equity (…). The ineffective portion of the gain or loss on the hedging instrument should be recognised in profit or loss”. There is an example in the book (page 207) where the gain on the hedge instrument exceeds the loss on the item hedged, but the effectiveness is still within 80%-125% range (gain on hedge instrument 11,6 mUSD and loss on hedged item 10 mUSD). In the example, 10 mUSD goes to OCI and 1,6 mUSD goes to P&L.
So my question is how to treat this when the hedge is not 100% effective? Do I understand it correctly:
– if the effectiveness goes beyond 80%-125% range, then everything goes to P&L
– if the effectiveness is within the range 80%-125%, then 100% goes to OCI and the remaining part to P&L. In case it would be less then 100% then the whole gain/loss would go to OCI ?I would really appreciate your explanation.
Thank you from advance!Who wrote the Student Accountant article? If it was the examiner (and you won’t be able to determine whether it was or it wasn’t!) then I would believe the article above BPP.
If it has been written by “one of the P2 marking team” then again I would believe that above BPP (the examiner will have approved that article)
I’ve just checked the article – written by Tom Clendon. Now, Tom is no fool and is a senior lecturer at Kaplan, specialising in P2. I’m leaning towards believing him rather than the BPP text.
Just be reassured that, should this come into the exam next Tuesday, you’ll be one of very few that has researched this topic sufficient to be in a position to be concerned as to whether Tom Clendon should be believed or do you put your money on BPP.
I’m not myself prepared to be definitive, neither one way nor the other – sorry 🙁
Ok, thank you Mike! Let’s just hope there will be no such question on the exam 🙂
“IAS 39 permits hedge accounting if it is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk as designated and documented, and effectiveness can be reliably measured, and
assessed on an ongoing basis and determined to have been highly effective.A hedge is highly effective if that offset falls within a 80–125% window. Hedge effectiveness has to be assessed both prospectively and retrospectively. All hedge ineffectiveness is recognised immediately in the statement of profit or loss (including ineffectiveness within the 80% to 125% window).”
The above information is from the article.
Hence, if the effectiveness falls out of the range oh 80%-125%, then the standard does not permit hedge accounting for that.Furthermore, I would recommend to go through “over-hedging” and “under-hedging”, which might justify the treatment for your second question.
Hope this helped 🙂
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