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IAS 39 HEDGE ACCOUNTING ( IN A DIFFERENT FORMAT )

CA Lalit Mohan Agarwal 
Updated on 30 June 2020

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IAS 39
    Financial Instruments: Recognition and Measurement
    Issued in March 1999
    Revised in December 2003
    Recent amendment: by IFRS 3 revised in January 2008
    Financial Instruments
 
   Hedge Accounting
    When can a derivative be designated as a hedging instrument?
      --> only if a derivative meets the conditions of IAS 39, Para. 88
 
    Can a purchased option qualify as a hedging instrument?
      --> Yes.
 
    Can a written option qualify as a hedging instrument?
      --> In general, no.
 
      When can a written option qualify as a hedging instrument?
      --> only when a written option is designated as an offset to a purchased option
 
    Can a non-derivative financial asset qualify as a hedging instrument?
      --> only for a hedge of a foreign currency risk
 
    Can a non-derivative financial liability qualify as a hedging instrument?
      --> only for a hedge of a foreign currency risk
 
    Three types of hedging relationships:
 
       (1) fair value hedge
       (2) cash flow hedge
       (3) hedge of a net investment in a foreign operation
 
    A hedge of foreign currency risk is treated
      --> as a fair value hedge or a cash flow hedge
 
    Conditions of IAS 39, Para. 88:
 
       (1) formal designation and documentation of hedging relationship
            --> at the inception of hedge
 
       (2) hedge is expected to be highly effective
 
       (3) effectiveness of hedge can be reliably measured
 
       (4) hedge is assessed and determined to have been highly effective
 
       (5) for cash flow hedges, a forecast transaction
            --> is highly probable and
            --> presents an exposure to variations in cash flows  
 
    Fair value hedges
     
      (1) for a derivative hedging instrument,
           --> gain or loss
           --> from remeasuring a derivative hedging instrument at fair value
           --> is recognised in profit or loss
 
      (2) for a non-derivative hedging instrument,
           --> foreign currency component of its carrying amount
           --> measured using the rules of IAS 21
           --> is recognised in profit or loss
 
      (3) gain or loss on the hedged item
           (attributable to the hedged risk)
           --> is recognised in profit or loss
           --> by adjusting carrying amount
                 (of hedged item)  
 
    Cash flow hedges
     
      Gain or loss on hedging instrument:
            (1) effective portion
                 --> recognised in
                       other comprehensive income
 
           (2) ineffective portion
                 --> recognised in
                       profit or loss
 
    Hedges of a net investment in a foreign operation
 
      Gain or loss on hedging instrument:
            (1) effective portion
                 --> recognised in
                       other comprehensive income
 
           (2) ineffective portion
                 --> recognised in
                       profit or loss
 
      When the foreign operation is disposed of:
      --> gain or loss recognised in other comprehensive income
      --> is reclassified to profit or loss
      --> as a reclassification adjustment   

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