Hedge of a net investment in a foreign operation
When hedge accounting conditions are met, the effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and accumulated in equity as part of the foreign currency translation reserve; the ineffective portion is recognised in profit or loss. The accumulated effective portion is dealt with on disposal of the foreign operation in accordance with the applicable requirements.
Worked example
A parent designates a qualifying foreign-currency borrowing as a hedge of its net investment in an overseas subsidiary. If exchange movements generate an effective $30,000 loss on the borrowing, that effective amount is recognised in OCI, subject to the hedge accounting conditions.
Common mistake
Assuming designation automatically achieves hedge accounting, or taking all effective exchange movements immediately to profit or loss.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | SBR | Supporting | September 2026–June 2027 |