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Fair value hedge accounting – ACCA (SBR) lectures

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  1. As Chris mentions if the we adopt hedge accounting the accounting for loans at amortised costs is not applied, now this confuses me because in theory the hedging instrument should not have any effect on the loan as it is a separate item used for reducing variability in the Profits, so my understanding is that the liability would still be carried at amortised cost while the instrument is accounted for separately. Now I am intrigued to know if the gains/losses on the hedging instrument have any effect on the effective rate used for discounting a liability held under Amortised costs (As the effective rate in theory takes into account all the expenses and income) or does this make the accounting way too complicated lol

  2. Could you explain for me what is the difference between cash flow hedge and fair value hedge? I read the definition but I don’t understand exactly the nature of each

    • The exact difference is the hedged item (i.e., what is being hedged/protected from risk).

      In Cash Flow Hedge, the hedged item is a future inflow/outflow of cash; the hedging instrument is recognized (in OCI) before the actual inflow/outflow (which is what is being hedged) has taken place. Once the expected cash flow takes place, the hedging instrument is transferred from OCI to P/L.

      In a Fair Value Hedge, the hedged item is already recognized in the Financial Statements. The hedging instrument just helps to prevent fluctuations in the hedged item’s value. The gain/loss of both the hedged item and the hedging instrument are taken to P/L (OCI is not involved here).

      Hope this helps; If I made an error, kindly correct me

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