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ma’am in this subpart I don’t understand why the answer doesn’t mention the use of FV hedge accounting rules? when we enter into derivatives for the purpose of hedging, then IFRS 9 financial instruments derivative rules don’t apply instead the hedge accounting rules apply. Here the question clearly states that commodity options have been purchased as a hedge against raw material prices, so then why….
To enter into a transaction to hedge a risk is a financial management practice – protecting the business from exposure to fluctuations by locking the company into a predictable outcome – you know this from your FM studies.
To hedge account is quite another thing – an accounting choice that will eliminate some of the volatility that would otherwise be reported in profit or loss. You should know from SBR that a hedge relationship only qualifies for hedge accounting when ALL of some very strict criteria have been met (e.g. concerning the hedge ratio of the documented relationship between an eligible hedging instrument and a formally designated hedged item). You cannot assume this from the mere mention of the word “hedge” in the scenario.
Oh ya I recall! you are talking about the following 3 criteria, right?
1. the hedging relationship consist of valid hedged item and hedging instrument
2. at the inception of the hedge there is formal documentation identifying the hedged item and hedging instrument
3. the hedge effective criteria are metso unless the question specifically states that “hedge criteria” have been met, I should dare not assume!
The Q would need to point to hedge accounting – by, for example, an explicit statement that the company is/will hedge account – in which case it may be relevant to refer the criteria in the answer (e.g. as a matters to consider and/or the documentation as evidence). Or the question could describe a hedged transaction around the key words of the criteria (as I mentioned in my first post) to imply hedge accounting.
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