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Hi,
I’m very confused with this and my textbook is no clearer:
‘For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss (or OCI, if hedging an equity instrument at FVTOCI and the hedging gain or loss on the hedged item adjusts the carrying amount of the hedged item and is recognised in profit or loss. However, if the hedged item is an equity instrument at FVTOCI, those amounts remain in OCI.’
Is it simply that if the hedged item is an equity instrument designated at FVTOCI the gains and losses of the hedging instrument go to OCI, otherwise its all in the p&l?
thanks
Hi Sarah,
You’ve found another tricky one!
If you ignore the nonsense about FVTOCI items and are happy with the basic treatment of a FV hedge (i.e. gains/losses on both item and instrument go through profit or loss) then you’ll be fine.
The nonsense about FVTOCI items confuses it but I’ll try and help.
Imagine you’ve got an investment in shares that you’re holding for the long term so is classified as FVTOCI and you wish to hedge against changes in price. You decide to buy an option/future on the shares which is by definition a derivative. What the rules are saying is that because the item (shares) you’ve got recognises the gains/losses through OCI then instead of moving these to profit or loss to match against the gains/losses on the instrument (option/futures) then we recognise the gains/losses on the instrument in OCI instead.
Remember, it’s all about matching and you’ve found the tiny bit of the standard that states that even if it is FV hedge and gains/losses go through profit or loss, here it is ever so slightly different and everything goes through OCI.
Thanks
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