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Wiley IFRS: Practical Implementation Guide and Workbook
This case illustrates the accounting fo r a f air value hedge.
Facts
Entity A has originated a
5%
fixed rate loan asset that is measured at amortized cost
($100,000).
Be–
cause Entity A is considering whether to securitize the loan asset (i.e., to sell it in a securitization trans–
action), it wants to eliminate the risk of changes in the fair value of the loan asset. Thus, on January I,
20X6,
Entity A enters into a pay-fixed, receive-floating interest rate swap to convert the fixed interest
receipts into floating interest receipts and thereby offset the exposure to changes in fair value. Entity A
designates the swap as a hedging instrument in a fair value hedge of the loan asset.
Market interest rates increase. At the end of the year, Entity A receives
$5,000
in interest income on the
loan and
$200
in net interest payments on the swap. The change in the fair value of the interest rate swap
is an increase of
$1,300.
At the same time, the fair value of the loan asset decreases by
$ 1,300.
Required
Prepare the appropriate journal entries at the end of the year. Assume that all conditions for hedge ac–
counting are met.
Solution
DrCash
5,000
Cr Interest income
5,000
(To record interest income on the loan)
DrCash
200
Cr Interest income
200
(To record the net interest settlement ofthe swap)
Dr Derivative
1,300
Cr Hedging gain
1,300
(To record the increase in the fa ir value ofthe swap )
DrHedging loss
1,300
Cr Loan asset
1,300
(To record the decrease in the fa ir value of the loan asset attributable to the hedged risk)
8.5 Cash Flow Hedge
8.5.1 A
cash flow hedge
is a hed ge of the expos ure to variabi lity in cas h flows that
• Is attributable to a particul ar risk associated with a recognized ass et or liab ility or a highl y
probable forecast tran sacti on ;
and
• Could affect profit or loss.
8.5.2 (A fore cast tran saction is an uncommitted but anticipated future transaction. )
8.5.3 Cash flow hedge accounting invol ves thi s accounting:
• Changes in the fair value of the hedging instrument attributable to the hedged risk are de–
ferred as a separa te component of equity to the extent the hed ge is effec tive (rather than be–
ing recognized immedi ately in profit or loss).
• The accounting for the hed ged item is not adj usted.
• If a hedge of a fo recast transaction subsequently results in the recognition of a non fin ancial
asset or nonfinancial liability (or becomes a firm commitment for whi ch fair value hedge ac–
counting is applied), the entity has an accounting policy choice of whether to keep deferred
gains and losses in equity or remove them from equity and include them in the initi al ca rry–
ing amount of the recognized asset, liability, or firm commitment (a so-called basis adj ust–
ment).
• If
a hedge of a for ecast transaction subsequently results in the recognition of a financial asset
or financial liab ility, the deferred ga ins and losse s continue to be deferred in equity.
• When the hedged item affects profit or loss (e .g., throu gh depreci ation or amo rtization) , any
corresponding amount pre viou sly deferred in equity is relea sed from equity and included in
profit or loss ("recycled" ).