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Cash flow hedge accounting – ACCA (SBR) lectures

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  3. Sir, in the example of ranges. The company is contracted to buy at 0.2 mil so this is inception of derivative contract and the change in market price and contracted price goes to PL at each reporting date, but eventually the company just paid 0.2 mil. So why in the example, the purchase is 0.25 without hedge accounting?

  5. In the illustration you gave: When we have the Financial Asset of $0.05m (gain in the hedging instrument); we debit Financial Assets is SFP, where does the Credit entry goes?

    In addition, assuming we have a loss, we will have a financial liability (credit in SFP), where does the Debit go?

    Thanks

  6. A company enters into a derivative contract in order to protect its future cash inflows relating to a recognised financial asset. At inception, when the fair value of the hedging instrument was nil, the relationship was documented as a cash flow hedge.

    By the reporting date, the loss in respect of the future cash flows amounted to $9,100 in fair value terms. It has been determined that the hedging relationship meets all effectiveness criteria.
    Required: Explain the accounting treatment of the cash flow hedge if the fair value of the hedging instrument at the reporting date is:
    (a) $8,500 (b) $10,000.

    in the first question the journal entry is

    dr derivative 8500
    cr oci 8500

    where will the other 600 go? please help

    • Hi,

      We only account for the 8,500 as this is the amount associated with the hedging instrument. Any changes on the item, i.e. the future cash flows, are not accounted for until the transaction takes place.

      Thanks

      • thank you for quick response.
        could you please explain me through an example how the fair value of hedging instrument moves to the opposite side of the fair value of the hedged item?
        thanks

      • It works in that with the derivative you are effectively placing a bet on the opposite of what you expect to happen. So if you expect the prices to rise in future then you place the derivative bet on prices falling. If prices rise then you pay more on the open market (loss) for the item but you’ve won your bet (gain) on the derivative (instrument) so the loss on one is offset by the gain on the other.

        Thanks

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