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Dear tutor,
hope you are fine.Sorry as I am asking a question which relates to DipIFR which is about cashflow hedge.
On June 2020, question 2, part b the question is about cashflow hedge.
I am happy with the answer, except one point and that is:
the answer says: The transfer of cumulative gains arsing from cashflow hedge to PPE will NOT affect other comprehensive income.
So it means:
Dr cashflow hedge reserve 160,000
Cr PPE160,000Why? why it is NOT transferred through OCI? I mean why the below entry is wrong?
Dr OCI 160,000
Cr PPE 160,000Thanks
Strictly double entry is DR RESERVE CR P&L
Another way of writing the same thing is DR OCI CR P&L
(There is no ledger account called OCI)
Hello sir and thank you for your answer.
Unfortunately it is yet not clear for me 🙁
in the past papers there are two questions regarding cashflow hedge.
One of them is about buying an inventory (June 2011 Q2 part a) In that example, when we wanted to transfer the cashflow reserve to inventory value (resulting to increase the value of the inventory), the transfer was through OCI. so here we had reclassification to PL.
But in another example (June 2020, question 2, part b) which was about buying a PPE, when we wanted to transfer the cashflow reserve to inventory value (resulting to decrease the value of the PPE), the transfer was NOT through OCI. it was directly through reserve. so no reclassification.
My question is why our approach is NOT the same in the both cases. in both cases the transfer would adjust the value of the asset (inventory or PPE) and as the result on both case our PL would be affected ( inventory through COGS and PPE through depreciation). However in the case of inventory, we are reclassifying, but for PPE the reclassification through PL never occurs.
Assume there is a gain on the derivative.
Inventory:
Dr CF hedge reserve Cr P&L – so recycling to P&L is straight away
PPE
Dr CF hedge reserve Cr PPE – so recycling to P&L indirectly by reducing the depreciation charge
So in both cases the gain hits the P&L
Finally – whenever you Dr CH hedge reserve you will also report the number in OCI
Easier to conceptualise as RECYCLING rather than RECLASSIFICATION
Dear tutor,
Thanks for your answer.
Yes, I do 100% agree with you. But all my problem is that the answer of ACCA says something different.I copy and paste the ACCA answer for you ( it relates to DipIFR exam, June 2020, question 2, note 2, purchase of machine ):
The cumulative gains will have been accumulated in a cash flow hedge reserve and the inclusion of these gains in property, plant and equipment will be achieved by a direct transfer out of this reserve. This transfer will not affect other comprehensive income.
my question is that why it says the transfer will NOT affect other comprehensive income? Why we should not report the number in OCI?!!!! I am confused.
Thanks a million.
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