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Hi,
Could you kindly clarify the treatment of a cashflow hedge please?
Thanks
Must be formal documentation identifying the hedged item and the hedge instrument
Hedge must be expected to be highly effective
Effectiveness of hedge should be capable of reliable measurement
Hedge is on-goingly reassessed and is still determined to be effective
Hedged item and hedging instrument will be measured initially at fair value with all gains and losses going through PorL
Instrument will be remeasured at fair value and the gain on the effective part will go to Equity
The ineffective part of the gain / loss on remeasurement will go to P{orL
If hedged item eventually results in recognition of financial asset or liability, the gain or loss held in “Other components of Equity” will be recycled either by adjusting the carrying amount of the financial asset / liability or by recycling through PorL over the same period of time of the consumption of the financial asset / liability
Thanks for this.
When you said ‘Hedged item and hedging instrument will be measured initially at fair value with all gains and losses going through PorL’; which gains/losses are you actually referring too please? When you acquire a hedging instrument you initially measure at FV, however how will there be a gain/loss on this if you have nothing to compare it to please?
Just realised…that was a stupid question. Please ignore. Thanks for your help 🙂
Can I ask another question though…you said that if a hedge is ineffective the ineffective part will go to Income Statement. However, if a gain/loss is above or below the 80 – 125% rule and therefore results in being ineffective, shouldn’t the whole gain/loss be taken to Income Statement? Not just the part which is above or below the amount, right?
Thanks
No, just the gain or loss on the ineffective portion will go through PorL. The portion of the gain or loss which is related to the effective part of the hedge will go through equity
Thank you.
In the technical article it gives an example. It says imagine the hedging instrument reports a gain of $19m and the cost of the asset had only risen by $9.5m, therefore the hedge was 200% (19.5/5) effective and outside the 80-125% rule. This means that the relationship is not highly effective and therefore not permitted. The whole $19m gain on the hedging instrument must therefore be recognised in the statement of profit and loss.
However, if only the ineffective part goes straight to profit and loss and the effective part to OCI, why don’t we only take the amount that falls above 125% to profit and loss and the rest to OCI please?
Sorry, but I just want to make sure that I am understanding correctly.
I’ve just checked in the Kaplan study text which confirms my earlier post – the effective element gain / loss will be taken to equity and recognised in the statement of changes in equity.
The ineffective portion of the gain / loss will be reported immediately on PorL
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