"Part 3: Hedge accounting is defined as one or more hedging instruments so that their change in FV is an offset, in whole or in part, to the change in FV or cash flows of a hedged item; There are 3 instruments: hedged item (firm commitment, highly probable forecast transaction, or net investment in a foreign operation), hedging instrument (designated derivative whose FV or cash flows are expected to offset the changes in the FV or cash flows in the hedged item) and risk; Must meet the following conditions for HA: (1) At inception, there is formal documentation of the hedging relationship and risk management and strategy for undertaking the hedge & (2) Hedge is expected to be highly effective, both prospectively and retrospectively (80% to 125%) & (3) For cash flow hedges, a forecast transaction that is the subject of the hedge must be highly probable; An entity can choose whether or not to apply hedge accounting; There are three types of hedges: 1) fair value hedge; 2) cash flow hedge; 3) hedge of a net investment in a foreign entity; For fair value hedge, Carrying amount of the hedged item should be adjusted for the gain or loss attributable to the hedged risk even if the hedged item is otherwise measured at cost; Hedge accounting is used to reduce volatility in the P/L; For FVH, fair value changes from hedged instrument must enter P/L also, same as the hedged item; (1) Need to discontinue use of hedge accounting if the hedge instrument expires or is sold, terminated, or exercised or (2) hedge no longer meets the criteria for qualification for hedge accounting or (3) entity evokes the designation; For a cash flow hedge, portion of the gain/loss on the hedging instrument that is determined to be an effective should be recognized as OCI in the CFH and the ineffective portion hit P/L directly; Can use the ‘recycling’ (reverse to P/L in the same period in which A/L affect the P/L) or ‘basis adjustment method’ for treatment of CFHs (reverse to adjust initial cost of the A/L); For hedge of net investment in a foreign entity, effective proportion of gain/loss on hedging instrument enter OCI as ‘hedge of a net investment in a foreign entity reserve’; The ineffective portion should hit P/L immediately; INT FRS 116 relates to hedges of a net investment in a foreign operation; IFRS 9 has 3 phrases (Phase 1: classification and measurement; Phase 2: Exposure draft on impairment; Phase 3: Hedge accounting); In the new phase 1, no reclassification of FA is allowed unless business model changes; Can only account by amortized cost if (1) entity’s objective is to hold the instrument for contractual cash flow collection and (2) the contractual cash flows solely represent principal and interest payments ; All other FIs will be through FVTPL or FTOCI (equity instruments, no recycling to P/L is allowed); Embedded derivatives do not need to be split from host contract (being reconsidered); Phase 2: use an expected loss model where expected losses on FA are determined and accounted for on origination and acquisition. Better for credit risk management." - Marcus Chan
Posted on: Sun, 15 Sep 2013 10:00:21 +0000
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