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    HOME / ARTICLES / ACCOUNTS / AS 30 HEDGE ACCOUNTING

    CA Lalit Mohan Agarwalposted on 30 July 2009

    AS 30 HEDGE ACCOUNTING

    ACCOUNTING STANDARD (AS) 30

    Financial Instruments: Recognion and

    Measurement

    Hedge accounng

    Definions Relang to Hedge Accounng

    8.14 A firm commitment is a binding

    agreement for the exchange of a specified

    quanty of resources at a specified price on

    a specified future date or dates.

    8.15 A forecast transacon is an

    uncommied but ancipated future transacon.

    8.16 Funconal currencyis the currency of the primary economic environment in which the

    enty operates.

    8.17 A hedging instrument is (a) a designated derivave or (b) for a hedge of the risk of

    changes in foreign currency exchange rates only, a designated nonderivave financial asset or

    nonderivave financial liability whose fair value or cash flows are expected to offset changes

    in the fair value or cash flows of a designated hedged item (paragraphs 8186 and Appendix A

    paragraphs A114A117 elaborate on the definion of a hedging instrument).

    8.18 A hedged itemis an asset, liability, firm commitment, highly probable forecast transacon

    or net investment in a foreign operaon that (a) exposes the enty to risk of changes in fair

    value or future cash flows and (b) is designated as being hedged (paragraphs 8794 and

    Appendix A paragraphs A118A125 elaborate on the definion of hedged items).

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    Hedge effecvenessis the degree to which changes in the fair value or cash flows of the

    hedged item that are aributable to a hedged risk are offset by changes in the fair value or

    cash flows of the hedging instrument (see Appendix A paragraphs A129A138).

    Hedging

    80. If there is a designated hedging relaonship between a hedging instrument and ahedgeditem as described in paragraphs 9598 and Appendix A paragraphs A126A128,accounng for

    the gain or loss on the hedging instrument and the hedged item should follow paragraphs

    99113.

    Hedging Instruments

    Qualifying Instruments

    81. This Standard does not restrict the circumstances in which a derivave may be designated

    as a hedging instrument provided the condions in paragraph 98 are met, except for some

    wrien opons (see Appendix A paragraph A114). However, a nonderivave financial asset or

    nonderivave financial liability may be designated as a hedging instrument only for a hedge of

    a foreign currency risk.

    82. For hedge accounng purposes, only instruments that involve a party external to the

    reporng enty (i.e., external to the group, segment or individual enty that is being reported

    on) can be designated as hedging instruments. Although individual enes within a

    consolidated group or divisions within an enty may enter into hedging transacons with

    other enes within the group or divisions within the enty, any such intragroup transacons

    are eliminated on consolidaon. Therefore, such hedging transacons do not qualify for hedge

    accounng in the consolidated financial statements of the group. However, they may qualify

    for hedge accounng in the individual or separate financial statements of individual enes

    within the group or in segment reporng provided that they are external to the individualenty or segment that is being reported on.

    Designaon of Hedging Instruments

    83. There is normally a single fair value measure for a hedging instrument in its enrety, and

    the factors that cause changes in fair value are codependent. Thus, a hedging relaonship is

    designated by an enty for a hedging instrument in its enrety. The only excepons permied

    (a) separang the intrinsic value and me value of an opon contract and designang as the

    hedging instrument only the change in intrinsic value of an opon and excluding change in its

    me value; and

    (b) separang the interest element and the spot price of a forward contract.

    These excepons are permied because the intrinsic value of the opon and the premium on

    the forward can generally be measured separately. A dynamic hedging strategy that assesses

    both the intrinsic value and me value of an opon contract can qualify for hedge accounng.

    84. A proporon of the enre hedging instrument, such as 50 per cent of the noonal amount,

    may be designated as the hedging instrument in a hedging relaonship. However, a hedging

    relaonship may not be designated for only a poron of the me period during which a

    hedging instrument remains outstanding.

    85. A single hedging instrument may be designated as a hedge of more than one type of risk

    provided that (a) the risks hedged can be idenfied clearly; (b) the effecveness of the hedge

    can be demonstrated; and

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    (c) it is possible to ensure that there is specific designaon of the hedging instrument and

    different risk posions.

    86. Two or more derivaves, or proporons of them (or, in the case of a hedge of currency risk,

    two or more nonderivaves or proporons of them, or a combinaon of derivaves and

    nonderivaves or proporons of them), may be viewed in combinaon and jointly designated

    as the hedging instrument, including when the risk(s) arising from some derivaves offset(s)

    those arising from others. However, an interest rate collar or other derivave instrument thatcombines a wrien opon and a purchased opon does not qualify as a hedging instrument if

    it is, in effect, a net wrien opon (for which a net premium is received). Similarly, two or more

    instruments (or proporons of them) may be designated as the hedging instrument only if

    none of them is a wrien opon or a net wrien opon.

    Hedged Items

    Qualifying Items

    87. A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a

    highly probable forecast transacon or a net investment in a foreign operaon. The hedged

    item can be (a) a single asset, liability, firm commitment, highly probable forecast transacon

    or net investment in a foreign operaon, (b) a group of assets, liabilies, firm commitments,

    highly probable forecast transacons or net investments in foreign operaons with similar risk

    characteriscs or (c) in a porolio hedge of interest rate risk only, a poron of the porolio of

    financial assets or financial liabilies that share the risk being hedged.

    88. Unlike loans and receivables, a heldtomaturity investment cannot be a hedged item with

    respect to interestrate risk or prepayment risk because designaon of an investment as

    heldtomaturity requires an intenon to hold the investment unl maturity without regard to

    changes in the fair value or cash flows of such an investment aributable to changes in

    interest rates.

    However, a heldtomaturity investment can be a hedged item with respect to risks from

    changes in foreign currency exchange rates and credit risk.

    89. For hedge accounng purposes, only assets, liabilies, firm commitments or highly

    probable forecast transacons that involve a party external to the enty can be designated as

    hedged items. It follows that hedge accounng can be applied to transacons between

    enes or segments in the same group only in the individual or separate financial statements

    of those enes or segments and not in the consolidated financial statements of the group. As

    an excepon, the foreign currency risk of an intragroup monetary item (e.g., a

    payable/receivable between two subsidiaries) may qualify as a hedged item in the

    consolidated financial statements if it results in an exposure to foreign exchange rate gains orlosses that are not fully eliminated on consolidaon in accordance with Accounng Standard

    (AS) 11, The Effects of Changes in

    Foreign Exchange Rates. In accordance with AS 11, foreign exchange rate gains and losses on

    intragroup monetary item are not fully eliminated on consolidaon when the intragroup

    monetary item is transacted between two group enes that have different funconal

    currencies19. In addion, the foreign currency risk of a highly probable forecast intragroup

    transacon may qualify as a hedged item in consolidated financial statements provided that

    the transacon is denominated in a currency other than the funconal currency of the enty

    entering into that transacon and the foreign currency risk will affect consolidated profit or

    loss.

    Designaon of Financial Items as Hedged Items

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    90. If the hedged item is a financial asset or financial liability, it may be a hedged item with

    respect to the risks associated with only a poron of its cash flows or fair value (such as one or

    more selected contractual cash flows or porons of them or a percentage of the fair value)

    provided that effecveness can be measured. For example, an idenfiable and separately

    measurable poron of the interest rate exposure of an interestbearing a