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Wiley lFRS: Practical Implem entation Guide and Workbook
Solution
( I) lAS 39 identifies three types of hedging relationships:
(a)
Fair value hedges
are hedges of the exposure to changes in fair value of a recognized asset
or liability or an unrecognized firm commitment that is attributable to a particular risk and
that could affect profit or loss. Under fair value hedge accounting, if the hedged item is
otherwise measured at cost or amortized cost, the measurement of the hedged item is ad–
justed for changes in its fair value attributable to the hedged risk. These changes are recog–
nized in profit or loss. If the hedged item is an available-for-sale financial asset, changes in
fair value that would otherwise have been included in equity are recognized in profit or
loss.
(b)
Cash fl ow hedges
are hedges of the exposure to variability in cash flows that is attributable
to a particular risk associated with a recognized asset or liability or a highly probable fore–
cast transaction and could affect profit or loss. Under cash flow hedge accounting, changes
in the fair value of the hedging instrument attributable to the hedged risk are deferred as a
separate component of equity to the extent the hedge is effective (rather than being recog–
nized immediately in profit or loss).
(c)
Hedges ofnet investments in fo reign operations
are accounted for like cash flow hedges.
(2) Entities may want to use hedge accounting to avoid mismatches in the recognition of gains and
losses on related transactions. When an entity uses a derivative (or other instrument measured at
fair value) to hedge the value of an asset or liability measured at cost or amortized cost or not
recognized at all, accounting that is not reflective of the entity' s financial position and financial
performance may result because of the different measurement bases used for the hedging in–
strument and the hedged item. The normally applicable accounting requirements would include
the changes in fair value of a derivative in profit or loss but not the changes in fair value of the
hedged item in profit or loss. In addition, when an entity uses a derivative (or other instrument
measured at fair value) to hedge a future expected transaction, the entity would like to defer the
recognition of the change in fair value of the derivative until the future transaction affects profit
or loss. Otherwise, the changes in fair value of a derivative hedging instrument would be recog–
nized in profit or loss without a corresponding offset associated with the hedged item.
(3) The hedge accounting conditions are
(a) There is formal designation and documentation of the hedging relationship and the entity' s
risk management objective and strategy for undertaking the hedge. Hedge accounting is
permitted only from the date such designation and documentation is in place.
(b) The hedge is expected to be highly effective in achieving offsetting changes in fair value or
cash flows attributable to the hedged risk.
(c) The effectiveness of the hedge can be measured reliably.
(d) The hedge is assessed on an ongoing basis and determined actually to have been highly
effective throughout the financial reporting periods for which the hedge was designated.
(e) For cash flow hedges, a hedged forecast transaction must be highly probable and must pre–
sent an exposure to variations in cash flows that could ultimately affect profit or loss.
8.4
Fair Value Hedge
8.4.1 A
f air value hedge
is a hedge of the expos ure to ch anges in fair value of a recogni zed asse t
or liability or an unrecogn ized firm commitment that is attri bu table to a particul ar risk and that
cou ld affect profit or loss. (A firm commi tment is a bindi ng ag reement for the exc hange of a speci–
fie d qu antity of resources at a speci fied price on a specified future date or dates.)
8.4.2 Fair va lue hedge accounti ng involves thi s accounting :
o
The hedging instrument is measured at fa ir value with ch anges in fai r value recogni zed in
profit or loss.
o
If the hedged item is otherwise measured at co st or amortized co st (e.g., becau se it is classi–
fied as a loa n or rece ivabl e), the measurement of the hedged item is adj usted for change s in
its fair va lue att ributabl e to the hedged risk. These changes are rec ogn ized in profit or loss.
o
If the hedged item is an avai lable-for-sale financ ial as se t, changes in fair va lue that wo uld
otherwise have been incl uded in equity are recogni zed in profit or loss.
8.4.3 Unde r fa ir va lue hedge acco unting , changes in the fai r value of the hedging instrument and
of the hedged item are recognized in profit or loss at the same time. Th e result is that there will be
no (net) imp act on profit or loss of the hedging instrument and the hedged item if the hedge is fully