Hello,
IFRS 9 states that if the gain or loss on the hedging instrument since the inception of the hedge is greater than the loss or gain on the hedged item then the excess gain or loss on the instrument must be recognised in profit or loss. .
What is the reasoning behind the excess gain being recognized in profit or loss. Why not fully in OCI?
Thanks
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Cash Flow Hedge
2y ago#1It is argued that the company has entered into a derivative contract that it is too 'big'.
Assume that:
- gain on hedged item is 100
- loss on derivative is 110
Arguably the company should have entered a derivative contract where the loss would only be 100 - this is, of course, impossible to predict.
The OCI entry is only to reflect the 'hedge' not the excess.
A bit like wearing a wetsuit just because it is raining lightly.
:)
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