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“Entity enters into 5 future contracts for 100 tonnes of coffee. The ratio is 20 tonnes to 1 contract.
If the item is designated as the purchase of 100 tonnes of coffee,then the hedging instrument should be designated as five future contracts.
If the item is designated as the purchase of 60 tonnes of coffee, then the hedging instrument should be designated as three futures contracts. The other two futures contracts will be accounted for as derivatives in the usual way (FVPL).”
1. In the 2nd case how will the remaining
2 contracts recorded differently from
the 3 designated future contracts?2.In the case of future purchase or sale
how do we recognise whether it is a
cash flow hedge or fair value hedge?Hi,
The second two contracts are treated as derivatives under the normal rules for derivatives, so revalue to fair value and gains/losses through profit or loss.
The treatment of the other contracts depends on whether they are part of a cash flow hedge of a fair value hedge. If a fair value hedge then there will be no difference in the treatment compared to the other two contracts.
If a cash flow hedge then the change in fair value goes through other comprehensive income.
Thanks
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