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One more question referring to the example above. If the change in hedged instrument is lesser than the the change in hedged item, a loss has occurred. Say, change in hedged item $700 but change in hedged instrument $600 therefore a loss of $100. How do we deal with this loss?
@wesbyss said:
The amount of gain / loss is recognised in OCI until the hedge is greater than the gain / loss in the hedged item. You are correct that the excess portion is recognized in P/L.In other words, if the change in hedging instrument is less than the change in hedged item (say 500), the full amount should go to OCI. (i.e. you dont treat the shortage portion as ineffective.)
By the way, the debit side should be the “derivative” (or the “hedged item”), if it is a CASH FLOW hedge.
Hi,
I thought the derivative is a hedge instrument? And based on what I know, we do not touch the hedged item for a cash flow hedge. Only the hedge instrument is affected when it comes to accounting treatment. Can you clarify this?
Thanks.@wesbyss said:
The maximum effective portion will be the change in fair value of the hedged item.If the change in fair value of the hedging instrument is greater, the excess will be the ineffective portion.
Hi,
Based on your first reply it seems that the $1,000 is a hedge instrument. Since the $1,000 (increase) is greater than the the change in future cash flow of the hedged item which is $700 (decrease):$700 – effective portion (Gain)
Debit – Financial assets $700
Credit – OCI (Cash flow hedge reserve) $700$300 – ineffective portion (Gain)
Debit – Financial assets $300
Credit – P/L (Ineffective portion of gain on hedging instrument)Am I getting it right?
And 1 more question. What if the change in hedged instrument is lesser than the change in hedged item? How to deal with it?
Thanks.@wesbyss said:
You have a financial assets (“hedged item”). You expect that the future cash flow of the financial assets will drop in future, so you enters into a derivative contract (“hedging instrucment”) and document the relationship of these two items as a cash flow hedge. Assume the fair value of the hedging item is 0 when you enter.Say the fair value of the future cash flow of the hedged item now actually drops, say by $700.
The accounting treatment will be different if the fair value of the hedging item is $1000.
$700 is effective and $300 is ineffective.
A perfectly effective hedge means that the upside of hedge item and the downside of hedging item is the same, and vice versa.
I don’t quite understand this example. This is a very confusing example.
How can the fair value of the hedging item is 0?
If the FV of future cash flow of hedged item dropped by $700, how can the fair value of hedging item be $1,000? Do you actually mean this $1,000 is hedge instrument?@wesbyss said:
The maximum effective portion will be the change in fair value of the hedged item.If the change in fair value of the hedging instrument is greater, the excess will be the ineffective portion.
Can you provide me with an example? Thank you.
Hi John,
What if the supplier does not agree with the price of 100,000 and the company decided to treat it as a loss instead of purchases. What would be the accounting entry be?Hello,
Thanks for rectifying my mistakes. I have another question. So is it correct to say that deferred income in this case is a liability instead of an asset? The term deferred income confuses me.
Thanks.Q1:
a. FCFF
b. Percentage changes in share price as a result of acquisition
c. Percentage changes of an extended project (Black Scholes Model)
d. Likely reaction of both companies and discussion on assumptions made in part cQ2
Consist of 3 proposals
Proposal 1
Further borrow 2m and share buy back
Proposal 2
Further borrow 2m and invest in NCA
Proposal 3
Can’t rememberImpact of these proposals on forecast financial statements
Securitisation
Q3
Swap
other factors to consider before repayment of debt using equityQ4
IRR/MIRR
Value at riskIt’s not complete. Can’t remember that much
@lchetcuti said:
What was question 1 last part about? Please reply as I am not sure if I left that out. It was on a page on its own but can someone tell me what was it about please?it’s about the secondment of an audit manager to the audit client as a temporary finance director.. appointment of a finance director with the assistance of the audit firm.. participation of meetings between board of directors by the audit partner on a monthly basis..
@muneebnawaz90 said:
well Outsourcing part required some calculation for discussing financial part
cost if outsourced ( 3500 x 6 ) + ( 250 x 6 ) – 1250 ( decrease in overhead ) = 21250 and if manufacture in house it will cost 4500 x 6 = 27000 . so financially beneficial but also discussed that make sure there might be some other cost which may make it financial not good. discussed quality issues and reliability in non financial part . attemted complete paper alhamdulilah . Hoping for good marks 🙂how did u come up with 4500 x 6? as far as i know, there are limited number of hours available if u r manufacturing it in house.. i did the ranking using contribution per hour and then calculate the total profit for in house and outsource..
I managed to google some of the words and found out that the question is from ICAB (The Institute of Chartered Accountants of Bangladesh). It is the past year question for Professional Examination – Level II (Nov-Dec. 2008) – Advance Financial Accounting [Question 1 part (c)] but no solution is given in their website.
I got it from Here but there is no solution to it.
I have found the solution from my lecturer. He said it is one of the past year questions although he did not mention which one. Thanks everyone for the kind reply.
Loss on disposal = 200,000 – 120,000 = 80,000
Total gov. grant for the disposed plant = 25% x 800,000 = 200,000
Unamortised gov. grant received = 200,000/5 = 40,000Total gov. grant for the new plant = 25% x 2,000,000 = 500,000
Gov. grant during the year (CL) = (500,000/5) x 3/12 months = 25,000
Gov. grant for the next 12 months (CL) = 100,000
Gov. grant for more than 1 year (NCL) = 375,000Depreciation for the year = (2,000,000 – 200,000)/5 x 3/12 months = 90,000
Then open T account
NCL
Debit side:
To CL 1,000,000
Bal. c/d 2,375,000
Total 3,375,000Credit side:
Bal. b/d 3,000,000
Bank 375,000
Total 3,375,000CL
Debit side:
Bank (Disposed plant) 40,000
SOCI (240,000-40,000+25,000) 225,000 **
Bal. c/d 1,100,000
Total 1,365,000**The tricky part is here. It is the amount to be actually shown in the SOCI. So we minus the refunded gov. grant (disposed plant) and plus the gov. grant received during the year(new plant).
Credit side:
Bal. b/d 240,000 (to be included in SOCI during the year end 31 March 2011)
From NCL 1,000,000
Bank 125,000
Total 1,365,000