IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 25 / Financial Instruments: Recognition and Measurement (l AS 39)

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(a) The hedged item and hedging instrument are both measured at fair value with respect to the hedged risk, and changes in fair value are recognized in profit or loss. (b) The hedged item and hedging instrument are both measured at fair value with respect to the hedged risk, and changes in fair value are recognized directly in equity. (c) The hedging instrument is measured at fair value, with changes in fair value recognized directly in equity to the extent the hedge is effec tive. The accounting for the hedged item is not adj usted. (d) The hedging instrument is acco unted for in accordance with the accounting require– ments for the hedged item (i.e., at fair value, cost or amortized cost, as applicable), if the hedge is effective.

(d) It depends. lAS 39 requires embedded deriva tives to be accounted for separately if, and only if, the economic characteristics and risks of the embedded derivative and the host contrac t are not closely related and the comb ined contract is not measured at fair value with changes in fair value recognized in profit or loss. Answer: (d) 18. Which of the following is not a condition for hedge accounting? (a) Formal designa tion and documentation of the hedging relationship and the entity' s risk management objective and strategy for un– dertaking the hedge at inception of the hedging relationship. (b) The hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, the effectiveness of the hedge can be relia– bly measured , and the hedge is assessed on an ongoing basis and determin ed actually to have been effective. (c) For cash flow hedges, a forecast transaction must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss. (d) The hedge is expected to reduce the entity' s Answer : (d) 19. What is the accounting treatment of the hedging instrument and the hedged item under fair value hedge accounting? (a) The hedging instrument is measured at fair value, and the hedged item is measured at fair value with respect to the hedged risk. Changes in fair value are recognized in profit or loss. (b) The hedging instrument is measured at fair value, and the hedged item is measured at fair value with respect to the hedged risk. Changes in fair value are recognized directly in equity to the extent the hedge is effective. (c) The hedging instrument is measured at fair value with changes in fair value recognized directly in equity to the extent the hedge is effective. The accounting for the hedged item is not adjusted. (d) The hedging instrument is accounted for in net exposure to the hedged risk, and the hedge is determined actually to have re– duced the net entity-wide exposure to the hedged risk.

Answer: (c)

accordance with the accounting require– ments for the hedged item (i.e., at fair value, cost or amortized cost, as applicable), if the hedge is effective.

Answer: (a) 20. What is the accounting treatment of the hedging instrument and the hedged item under cash flow hedge accounting?