Tratamento de contabilidade de hedge forex

tratamento contabilístico Forex hedge
Com a compreensão profunda do mercado, uma abordagem de negócios centrada no cliente e uma experiência de engenharia incomparável, a FINCAD está estrategicamente posicionada para liderar o mercado em tecnologia de risco e avaliação corporativa.
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O FINCAD é o principal fornecedor de avaliações sofisticadas de avaliação e risco para carteiras de renda fixa e de renda fixa multi-ativos. O FINCAD ajuda mais de 1.000 instituições financeiras globais a aumentar os retornos, gerenciar riscos, reduzir custos, cumprir os regulamentos e dar confiança aos investidores e acionistas. Os clientes incluem os principais gerentes de ativos, hedge funds, companhias de seguros, pensões, bancos e auditores.

Hedge de fluxo de caixa.
O hedge de fluxo de caixa é um arranjo para gerenciar o risco de mudanças nos fluxos de caixa associados a um ativo ou passivo reconhecido ou a uma transação de previsão provável. É um dos três acordos de hedge reconhecidos pelas normas contábeis, sendo os outros hedge de justo valor e hedge de investimento líquido.
A maioria dos ativos e passivos tem fluxos de caixa periódicos associados, por exemplo, um investimento em títulos estrangeiros pode ter entradas de caixa sob a forma de recibos de juros denominados em moeda estrangeira. Da mesma forma, um empréstimo de taxa variável pode ter saídas de caixa sob a forma de pagamentos de juros que variam de acordo com uma taxa de juros de referência, digamos LIBOR. Uma vez que os fluxos de caixa para ambos os instrumentos são incertos porque dependem de variáveis ​​externas, ou seja, a taxa de câmbio e a taxa de juros prevalecente no mercado, as empresas podem optar por remover esse risco de variabilidade dos fluxos de caixa através de operações de hedge. Por exemplo, o risco de variabilidade de entradas de caixa da dívida em moeda estrangeira pode ser gerenciado através da troca de moeda envolvendo o pagamento da moeda estrangeira e o recebimento da moeda nacional. Da mesma forma, o risco nos fluxos de caixa da taxa de taxa flutuante pode ser mitigado através da permuta de taxa de juros envolvendo recibos em uma taxa flutuante e pagamentos a uma taxa fixa. Em um acordo de hedge, o instrumento usado para mitigar qualquer risco particular é chamado de instrumento de hedge e o ativo ou passivo cujo risco está sendo mitigado é chamado de instrumento coberto.
A contabilidade de hedge é opcional, o que significa que uma empresa pode optar por não adotar as regras contábeis específicas e, em vez disso, contabilizar o instrumento coberto e o instrumento de hedge separadamente. Se a contabilidade de cobertura não for adotada, o instrumento de hedge é reconhecido ao valor justo por meio do resultado. No entanto, se uma empresa optar por representar o hedge como um todo, ele deve atender a certos requisitos: ou seja, no início do hedge, o acordo de hedging deve ser documentado, ele deve ser altamente efetivo e permanecer efetivo ao longo do prazo do hedge. hedge e o instrumento de hedge, e o instrumento coberto deve ser identificado.
Se uma cobertura atende aos critérios de reconhecimento e é identificada como uma cobertura de fluxo de caixa, as mudanças no valor do instrumento de hedge devem ser divididas em dois componentes: o primeiro componente que corresponde exatamente à variação do valor do instrumento coberto deve ser registrado em outros rendimentos abrangentes; e qualquer mudança de valor em excesso deve ser reconhecida em lucros ou prejuízos. O valor reconhecido em outros resultados abrangentes é reclassificado para o resultado no momento da liquidação ou rescisão da relação de hedge.
Exemplo e entradas de diário.
Em 1 de dezembro de 2018, a Platform, Inc. celebrou um contrato de 1 ano com uma gigante multinacional de serviços financeiros para fornecer transporte aéreo aos seus executivos. De acordo com o contrato, a plataforma será paga 1.000 euros por quilômetro por 12.000 quilómetros mínimos garantidos por ano. O pagamento deve ser feito no final de cada trimestre. A plataforma obteve uma aeronave em um contrato de arrendamento molhado (ou seja, uma locação de aeronave junto com tripulação e manutenção, etc.). Uma vez que quase todos os custos da plataforma são denominados em USD, ele entra em um contrato a prazo de 3 meses para vender US $ 3.000.000 em USD1.5 / EUR.
No final do exercício, 31 de dezembro de 2018, o USD apreciou 1,45 / EUR e a empresa operou um total de 1.000 quilômetros ao longo do período de um mês.
No final de fevereiro de 2018, ou seja, no final do primeiro trimestre, a empresa havia prestado serviços para 3.100 quilômetros. A taxa de câmbio no final do trimestre foi de USD1.44 / EUR.
Este é um hedge de fluxo de caixa porque a Platform está buscando proteger o risco de variabilidade de seus fluxos de caixa, ou seja, receita. O instrumento de cobertura é o contrato a prazo, enquanto o instrumento coberto é o fluxo de caixa do contrato de serviços.
Com base em 1.000 quilômetros operados no primeiro mês, em dezembro de 2018, a Platform espera operar 3.000 quilômetros no primeiro trimestre e ganhar 3.000.000 euros (3.000 * EU1.000). O valor USD dos quilómetros esperados @ a taxa de câmbio do final do ano de USD1.45 / EUR é de US $ 4.350.000 contra a previsão inicial de US $ 4.500.000 (EUR 3.000,00 * 1.5). O movimento adverso nos fluxos de caixa devido à flutuação cambial é de US $ 150.000 (US $ 4.500.000 - $ 4.350.000). Essa perda nos fluxos de caixa futuros do movimento cambial é compensada pelo ganho no instrumento de hedge. O instrumento de cobertura habilita a Plataforma a converter EUR 3.000.000 em USD1.5 / EUR mesmo que o EUR se deprecie ao longo de um mês. O ganho no contrato a prazo é de US $ 150.000 (3.000.000 de euros * (1.5 - 1.45)). O instrumento de hedge compensa exatamente o movimento da expectativa de fluxo de caixa e é totalmente efetivo e, portanto, deve ser reconhecido em outros resultados abrangentes.
A plataforma deve efetuar o seguinte cadastro no dia 31 de dezembro de 2018:
No final do primeiro trimestre, uma vez que os quilômetros reais do trimestre eram 3.100, a exposição dos fluxos de caixa que exigiam cobertura aumentou para EUR 3.100.000 (= 3.100 * mil). O valor do contrato a termo no final de fevereiro seria de US $ 180.000 (3 mil milhões de euros * (1,5 - 1,44)). Isso representa um ganho de $ 30,000 ($ 180,000 menos $ 150,000) durante o último período de relatório.
O movimento real de câmbio adverso na transação de receita foi de US $ 186.000 (3,100,000 * (1,5 - 1,44)), o que é superior ao movimento favorável de US $ 180,000 no instrumento de hedge associado. Isso significa que o acordo de hedge foi ineficaz na medida de US $ 6.000 (= $ 186.000 - $ 180.000).
As normas contábeis exigem o reconhecimento do menor ganho ou perda acumulada no instrumento de hedge ou no valor justo do item coberto separadamente no outro resultado abrangente como reserva. O movimento favorável de US $ 30.000 no instrumento de hedge deve ser reconhecido da seguinte forma:
Na liquidação, todo o arranjo está envolvido da seguinte forma:
Por favor, note que a parte ineficaz de hedge de US $ 6.000 se reflete nos lucros e ganhos por meio de redução na receita, ou seja, a receita é calculada pela aplicação do relacionamento coberto 1,5USD / EUR com apenas o primeiro bônus de EUR 3.000.000 e os 100.000 adicionais são trocados em USD 1,44 / EUR, ou seja, a taxa de câmbio prevalecente.
Tópicos relacionados.
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Uma visão geral da Hedge Accounting.
Derivados são usados ​​frequentemente para mitigar ou compensar riscos (como juros ou risco cambial) decorrentes de atividades corporativas. O tratamento contábil padrão para instrumentos de hedge é que as mudanças no valor justo deverão ser registradas no Lucro e Perda (P & amp; L). Em oposição aos instrumentos de hedge, os ativos ou passivos cobertos são geralmente mensurados ao custo (amortizado) ou pelo valor justo por meio do patrimônio líquido, ou são itens previstos que não são reconhecidos no Balanço Patrimonial.
Isso resulta em uma avaliação (temporária) e / ou em um tempo; desajustes entre o item coberto e o instrumento de hedge. O objetivo da contabilidade de hedge é evitar a volatilidade indesejada temporária em P & amp; L como resultado dessas diferenças de avaliação e cronogramas. No entanto, as entidades podem praticar a contabilidade de hedge apenas se cumprirem os requisitos numerosos e complexos estabelecidos na IAS 39. Quais são esses requisitos e como a Zanders pode ajudá-lo nas diferentes etapas?
O que é hedging?
O objetivo da cobertura é mitigar o impacto de riscos não controláveis ​​no desempenho de uma entidade. Os riscos comuns são o risco de câmbio, o risco de taxa de juros, o risco do preço das ações, o risco do preço das commodities e o risco de crédito.
O hedge pode ser executado através de transações financeiras. Exemplos em que a cobertura é utilizada incluem:
uma entidade que tem um passivo em moeda estrangeira e quer se proteger contra a mudança na taxa de câmbio de uma empresa que efetua um swap de taxa de juros para que a taxa flutuante de um empréstimo se torne uma taxa fixa.
Tipos de hedge accounting.
Existem três tipos de hedge accounting: hedges de valor justo, hedges de fluxo de caixa e hedges do investimento líquido em uma operação no exterior.
O risco de cobertura em hedge de justo valor é uma alteração no valor justo de um ativo ou de um passivo. Por exemplo, as mudanças no valor justo podem surgir através de mudanças nas taxas de juros (para empréstimos de taxa fixa), taxas de câmbio, preços de ações ou preços de commodities. Cobertura de fluxos de caixa.
O risco que está sendo coberto em uma cobertura de fluxo de caixa é a exposição à variabilidade nos fluxos de caixa que é atribuível a um risco particular e pode afetar o resultado. A volatilidade nos fluxos de caixa futuros resultará de mudanças nas taxas de juros, taxas de câmbio, preços das ações ou preços das commodities. Hedges de investimento líquido em uma operação no exterior.
Uma entidade pode ter subsidiárias, associadas, joint ventures ou sucursais no exterior ("operações no exterior"). Pode cobrir o risco cambial associado à conversão dos ativos líquidos dessas operações no exterior para a moeda do grupo. A IAS 39 permite a contabilização de hedge para tal cobertura de um investimento líquido em uma operação no exterior.
O desajuste no reconhecimento do resultado.
De acordo com a norma contábil IAS 39, todos os derivativos são registrados pelo valor justo na demonstração do resultado. No entanto, esses derivados são freqüentemente utilizados para proteger os ativos e passivos reconhecidos, que são registrados pelo custo amortizado ou pelas operações previstas que ainda não foram reconhecidas no balanço ainda. A diferença entre a medição do valor justo do derivativo eo custo amortizado do ativo / passivo conduz a uma incompatibilidade no cronograma do reconhecimento do resultado.
A contabilidade de hedge procura corrigir este desajuste alterando o reconhecimento de tempo na demonstração do resultado. O tratamento contábil de hedge de valor justo acelerará o reconhecimento de ganhos ou perdas no item coberto na P & amp; L, enquanto a contabilidade de hedge de fluxo de caixa e a contabilidade de hedge de investimento líquido diferirão os ganhos ou perdas no instrumento de hedge.
A relação de cobertura.
A relação de cobertura consiste em um item coberto e um instrumento de hedge. Um item coberto expõe a entidade ao risco de mudanças no valor justo ou fluxos de caixa futuros que possam afetar a demonstração de resultados no momento ou no futuro. Por exemplo, um item coberto pode ser um empréstimo em que a entidade está pagando uma taxa flutuante (por exemplo, Euribor 6 meses + spread) para uma contraparte.
Se o instrumento de hedge for um derivado, ele pode ser designado inteiramente ou em proporção como um instrumento de hedge. Mesmo um portfólio de derivativos pode ser designado conjuntamente como um instrumento de hedge. O instrumento de hedge pode ser um swap em que a entidade está recebendo uma taxa flutuante e pagando uma taxa fixa. Com essa relação, a entidade está compensando os pagamentos de taxa flutuante e apenas pagará a taxa fixa.
Critérios para se qualificar para a contabilidade de cobertura.
Hedge accounting é uma exceção aos princípios contábeis habituais, portanto, ele deve atender a vários critérios:
No início do hedge, o item coberto e o instrumento de hedge devem ser identificados e designados. No início do hedge, o relacionamento de cobertura deve ser formalmente documentado. No início da cobertura, o relacionamento de cobertura deve ser altamente efetivo. A eficácia do relacionamento de cobertura deve ser testada periodicamente. A ineficácia é permitida, desde que o relacionamento de cobertura atinja uma relação de eficácia entre 80% e 125%.
Eficácia do hedge.
Cumprir o IAS 39 exige dois tipos de testes de eficácia:
Um teste prospectivo (voltado para o futuro) para verificar se o relacionamento de hedge deve ser altamente efetivo em períodos futuros. Um teste retrospectivo (voltado para trás) para avaliar se a relação de hedge realmente foi altamente efetiva em períodos passados.
Ambos os testes precisam ser altamente efetivos no início do hedge. Um teste prospectivo é altamente efetivo se, no início da relação de hedge e durante o período para o qual a relação de hedge é designada, as mudanças esperadas no valor justo dos fluxos de caixa são compensadas. O que significa que, durante a vida da relação de hedge, a variação no valor justo (devido à mudança nas condições de mercado) do item coberto deve ser compensada pela variação no valor justo do instrumento coberto.
Um teste retrospectivo é altamente efetivo se os resultados reais do hedge estiver dentro da faixa de 80% -125%.
Métodos de cálculo.
A IAS 39 não especifica um único método para o cálculo da efetividade do hedge. O método utilizado depende da estratégia de gerenciamento de riscos. Os métodos mais comuns são:
Comparação de termos críticos e # 8211; esse método consiste em comparar os termos críticos (nocional, termo, tempo, moeda e taxa) do instrumento de hedge com aqueles do item coberto. Este método não requer nenhum cálculo. Método de compensação do dólar e # 8211; Este é um método quantitativo que consiste em comparar a variação no valor justo entre o instrumento de hedge e o item coberto. Dependendo das políticas de risco da entidade, esse método pode ser realizado de forma cumulativa (desde o início) ou periodicamente (entre duas datas específicas). Um hedge é considerado altamente efetivo se os resultados estiverem dentro da faixa de 80% -125%. Análise de regressão & # 8211; Este método estatístico investiga a força da relação estatística entre o item coberto e o instrumento de hedge. De uma perspectiva contábil, esse método prova se o relacionamento é ou não suficientemente efetivo para se qualificar para a contabilidade de hedge. Não calcula a quantidade de ineficácia.
Terminação da relação de cobertura.
Uma relação de cobertura deve ser encerrada no futuro, quando ocorrer uma das seguintes ocorrências:
Uma cobertura falha em um teste de eficácia O item coberto é vendido ou liquidado Os instrumentos de hedge são vendidos, encerrados ou exercidos. A Administração decide rescindir a relação. Para uma cobertura de uma transação prevista; a transação prevista não é mais altamente provável.
Observe que esses requisitos descritos anteriormente podem mudar à medida que o IASB está atualmente trabalhando para substituir a IAS39 pela IFRS9 (nova qualificação de instrumentos de hedge, itens cobertos, efetividade de hedge ...)
Conclusão.
Hedge accounting é um processo complexo que envolve inúmeros e requisitos técnicos com o objetivo de evitar a volatilidade indesejada temporária em P & amp; L. Essa volatilidade é o resultado de uma avaliação e / ou desajuste temporário entre o item coberto e o instrumento de hedge. Se você está considerando a contabilidade de hedge, temos uma equipe dedicada no balcão de avaliação. Podemos oferecer conselhos sobre o cálculo dos valores de mercado dos riscos subjacentes e os instrumentos de hedge, bem como a criação da relação de hedge, a preparação da documentação e a contribuição para o tratamento contábil dos resultados.
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Alterações contábeis de hedge conforme IFRS 9.
Embora os mecanismos contábeis gerais permaneçam largamente inalterados, as longas reformas esperadas da IFRS 9 englobam uma série de mudanças que irão influenciar seu processo de contabilização de hedge de diferentes maneiras.
Os swaps de taxa de juros de moeda cruzada (CC-IRS), as opções, os contratos de Forex e os negócios de commodities são apenas alguns exemplos de instrumentos financeiros que serão afetados pelas próximas mudanças. O valor do tempo, os pontos de frente e o spread em moeda cruzada receberão um tratamento contábil diferente no IFRS 9. Dentro da Zanders, sentimos a necessidade de esclarecer essas mudanças importantes que merecem maior consciência possível.
1. Contabilização do elemento forward em moeda estrangeira para a frente.
Cada contrato de encaminhamento FX possui um elemento spot e forward. O elemento forward representa o diferencial de taxa de juros entre as duas moedas. De acordo com o IFRS 9 (semelhante ao IAS 39), é permitido designar todo o contrato ou apenas o componente spot como instrumento de hedge. Ao designar apenas o componente spot, a variação no valor justo do elemento forward é reconhecida no OCI e acumulada em um componente separado do patrimônio líquido. Simultaneamente, o valor justo dos pontos de adiantamento no reconhecimento inicial é amortizado, mais esperado linearmente, ao longo da vida do hedge.
Novamente, esse tratamento contábil só é permitido no caso de termos críticos serem alinhados (semelhantes). Se, no início, o valor real do elemento forward exceder o valor alinhado, as mudanças no valor justo com base no item alinhado passarão pelo OCI. A diferença entre o valor justo dos elementos diretos real e alinhados é reconhecida em P & amp; L. Caso o valor do elemento avançado alinhado exceda o valor real no início, as mudanças no valor justo são baseadas no menor do alinhado versus real e vão ao OCI. A mudança restante de real será reconhecida em P & amp; L.
Consulte o exemplo abaixo:
Neste exemplo, consideramos uma entidade X que está protegendo uma receita futura com um contrato de encaminhamento FX.
Mudança MtM do forward = 105,000 (spot element) + 15,000 (elemento forward) = 120,000.
Alteração MtM do item coberto = 105,000 (elemento spot) + 5,000 (elemento forward) = 110,000.
Examinamos alternativas de acordo com IAS39 e IFRS9 que mostram diferentes métodos contábeis, dependendo da separação entre o local e as taxas de juros.
De acordo com IAS39 e sem separação ponto / frente, o instrumento de cobertura representa a soma do ponto e do elemento forward (105 000 pontos + 15 000 frente = 120 000). O item coberto constituído por 105 000 elementos spot e 5 000 elementos forward e a relação hedge dentro dos limites, o mínimo entre o instrumento de hedge e o item coberto é listado como OCI e a diferença entre o instrumento de hedge e o item coberto vai para o P & amp; L.
No entanto, com a separação de ponto / frente de acordo com IAS39, o componente de avanço não está incluído no relacionamento de cobertura e, portanto, é levado direto para o P & amp; L. Tudo o que excede o movimento do item coberto é considerado como "hedge" e será reservado em P & amp; L.
As linhas 3 e 4, de acordo com IFRS9, caracterizam práticas de registro comparáveis ​​do que na IAS39. As mudanças ocorrem quando examinamos a linha 5, onde o elemento forward de 5 000 pode ser registrado como OCI. Neste caso, realiza-se um teste no ponto e no elemento de frente, em comparação com a linha anterior, onde ocorre apenas um teste.
2. Reequilibrar em uma relação de hedge de commodities.
Sob influência da mudança das circunstâncias econômicas, pode ser necessário alterar o índice de hedge, ou seja, a relação entre o valor do item coberto e o valor dos instrumentos de hedge. De acordo com a IAS 39, as mudanças em um índice de hedge exigem que a entidade interrompa a contabilidade de cobertura e reinicie com uma nova relação de hedge que captura as mudanças desejadas. O modelo de contabilidade de hedge IFRS 9 permite que você aperfeiçoe sua relação de cobertura sem ter que interromper a relação de hedge. Isso pode ser conseguido através do reequilíbrio.
O reequilíbrio é possível se houver uma situação em que a mudança na relação do instrumento de hedge e do item coberto pode ser compensada ajustando a relação de hedge. O índice de hedge pode ser ajustado aumentando ou diminuindo o número de instrumentos de hedge designados ou itens cobertos.
Ao reequilibrar uma relação de hedge, uma entidade deve atualizar a documentação da análise das fontes de ineficácia de hedge que se espera que afetem a relação de hedge durante o período restante.
Consulte o exemplo abaixo:
No exemplo 2, consideramos uma entidade X que está protegendo o consumo de combustível previsto com um swap de combustível. Observamos o que acontece quando a correlação entre o item coberto eo índice subjacente do swap muda de 100% para 80%.
De acordo com a IAS39, uma relação de hedge deve ser descontinuada se o índice de hedge estiver fora dos limites de efetividade. Dado que 130% está fora dos limites de efetividade, o montante total do instrumento de hedge da linha 1 deve ser contabilizado na P & amp; L.
Como, de acordo com o IFRS9, não há limite de eficácia de 80-125%, na linha 2, podemos, portanto, registrar 100 000 como OCI e os 30 000 de hedge ineficaz na P & amp; L. Na linha 3, podemos ver o que ocorre se reequilibrarmos o relacionamento de cobertura ao aumentar o volume do item coberto em 20%. % A razão, consequentemente, muda de 130% para 108,33%. Nesse caso, a cobertura excedente entre o item coberto e o instrumento de hedge é de 10 000, o que novamente deve ser contabilizado na P & amp; L e o resto pode ser registrado como OCI. O reequilíbrio só é possível quando o índice subjacente do swap e o item coberto não são os mesmos, mas fortemente correlacionados.
3. Contabilização de mudanças no valor do tempo das opções.
O valor justo de uma opção consiste em seu valor de tempo e seu valor intrínseco. O valor intrínseco é a diferença entre o preço de exercício e o preço de mercado do subjacente. O valor que resta é o valor do tempo da opção. A IFRS 9 introduz um novo tratamento contábil, comparado ao IAS 39, onde o tratamento foi principalmente através de P & amp; L. O IFRS 9 permite que (sob certas condições) flutuações no valor do tempo de uma opção seja reconhecido em outros resultados abrangentes (OCI) resultando em uma possível redução na volatilidade de P & amp; L.
Mudanças no valor justo do valor do tempo são temporariamente reconhecidas no OCI. O tratamento subsequente depende se o item coberto é relacionado à transação ou relacionado ao valor do tempo. O acima mencionado exige que os termos críticos do instrumento de cobertura, neste caso, a opção e o item coberto estejam alinhados (semelhantes). Caso contrário, parte da alteração no valor do tempo pode passar por P & amp; L. Este tratamento também é aplicável a combinações de opções, e. um colar de custo zero.
Consulte o exemplo abaixo:
A Entidade X está protegendo uma previsão a receber com uma chamada FX.
Alteração MtM da opção = 100,000 (valor intrínseco) + 40,000 (valor do tempo) = 140,000.
Alteração MtM do item coberto = 100,000 (valor intrínseco) + 30,000 (valor de tempo) = 130,000.
No exemplo 3, consideramos a entidade X como cobertura de uma previsão a receber por meio de uma chamada FX. Observe que, de acordo com IAS39, o item coberto não pode conter uma opcionalidade se esta opção não estiver presente na exposição subjacente. Portanto, neste exemplo, o item coberto não pode conter nenhum valor de tempo. O valor de tempo de 30.000 pode ser usado em IFRS9, mas somente por meio de um teste separado (ver linha 5).
Na linha 1, podemos ver que, sem uma separação tempo-intrínseca, o relacionamento de cobertura não está mais dentro do limite de 80-125%; portanto, ele precisa ser descontinuado e o MtM completo deve ser reservado na P & amp; L. Na linha 2, há uma separação tempo-intrínseca, e os 40 000 que representam o valor do tempo da opção não estão incluídos no relacionamento hedge, o que significa que eles vão direto para a P & amp; L.
De acordo com o IFRS9 sem separação tempo-intrínseco (linha 3), a relação de cobertura é contabilizada da maneira usual, uma vez que o limite de ineficácia não é aplicável, com 100 000 indo representando o OCI e os 40 000 cobertos para o P & amp; EU.
No entanto, a separação temporal-intrínseca de acordo com o IFRS9 na linha 4 é semelhante à linha 2 da IAS39, na qual optamos por remover imediatamente o valor do tempo da opção do relacionamento de hedge. Portanto, devemos ter um valor de 40 000 vezes no P & amp; L.
Na última linha, separamos o tempo e os valores intrínsecos, mas o valor do tempo da opção pretende ser reservado no OCI. Neste caso, um teste no elemento intrínseco e no tempo é realizado. Podemos, portanto, representar 100 000 no OCI intrínseco, 30 000 no OCI de tempo e 10 000 como hedge no P & amp; L.
4. O spread de moeda cruzada é considerado um custo de hedge.
O spread em moeda cruzada pode ser definido como o prémio de liquidez de uma moeda em relação à outra. Este prémio aplica-se às trocas de moedas no futuro, por exemplo, um instrumento de hedge como um contrato à frente do FX. Se um swap de taxa de juros em moeda cruzada é usado em combinação com um item coberto de moeda única, para o qual este spread não é relevante, a ineficácia de hedge pode surgir.
Para fazer face a este desfasamento, foi decidido expandir os requisitos relativos aos custos de hedge. Os custos de cobertura podem ser vistos como custos incorridos para proteger contra mudanças desfavoráveis. Semelhante à contabilização do elemento forward da taxa a prazo, uma entidade pode excluir o spread de moeda cruzada e contabilizar isso separadamente ao designar um instrumento de hedge. No caso de uma derivada hipotética ser utilizada, o mesmo princípio se aplica. A IFRS 9 estabelece que o derivado hipotético não pode incluir recursos que não existem no item coberto. Conseqüentemente, o spread de moeda cruzada não pode ser parte do derivado hipotético no caso mencionado anteriormente. Isso significa que a ineficácia do hedge irá existir.
Consulte o exemplo abaixo:
No exemplo 4, consideramos uma entidade X que cobre um empréstimo USD com um CCIRS.
MtM mudança de CCIRS = 215,000 & # 8211; 95.000 (base de moeda cruzada) = 120.000.
MtM mudança hedged = 195,000 & # 8211; 90,000 (base de moeda cruzada) = 105,000.
De acordo com IAS39, há apenas uma maneira de contabilizar o CCIRS. O valor total de 120 000 (incluindo a moeda - 95 000 em moeda estrangeira) é considerado como instrumento de cobertura, o que significa que 105 000 podem ser listados como OCI e 15 000 de hedge têm que ir para o P & amp; L.
De acordo com o IFRS9, existe a opção de excluir a base de moeda cruzada e contabilizar isso separadamente.
Na linha 2, podemos ver as condições de acordo com a IFRS9 quando uma moeda cruzada está incluída: a base de moeda cruzada não pode ser incluída no item coberto, portanto existe uma cobertura inferior a 75 000.
Na linha 3, excluímos a base de moeda cruzada do teste do instrumento de hedge. Ao registrar o movimento MtM de 195 000 como OCI, contamos os 95 000 de moeda corrente, bem como - / - 20 000 de hedge na P & amp; L. Na linha 4, a base de moeda cruzada está incluída em uma relação de hedge separada -, portanto, realizamos um teste extra na base de moeda cruzada (valores alinhados versus valores reais). Do primeiro teste, - / - 195,000 é registrado como OCI e - / - 20,000 (parte "over hedge") em P & amp; L; a partir do teste de moeda cruzada 90,000 representa OCI e 5,000 deve ser incluído em P & amp; L.
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Diferença entre hedge de valor justo e hedge de fluxo de caixa.
A primeira coisa que você precisa fazer antes mesmo de começar a jogar com contabilidade de cobertura é determinar o tipo de relacionamento de cobertura que você está lidando.
Porque: o tipo de hedge determina suas entradas contábeis. Não se engane aqui. Se você identificar incorretamente o tipo de hedge, sua contabilidade de cobertura ficará totalmente errada.
Mas aqui está o assunto:
Embora todos os tipos de hedges estejam perfeitamente definidos na IAS 39 / IFRS 9, todos nós lutamos com a compreensão das diferenças e distinguindo um tipo do outro.
Algumas semanas atrás, eu estava dando uma palestra sobre hedge accounting para o grupo de auditores. A maioria deles era gerentes de auditoria e idosos - então não são realmente calouros, mas pessoas experientes e altamente qualificadas.
No entanto, após cerca de 5 ou 10 minutos de falar sobre diferentes tipos de hedges, um gerente de auditoria interrompeu-me com a pergunta:
"Silvia, eu recebo as definições. Eu simplesmente não entendo a diferença. O significado real de uma diferença entre hedge de justo valor e hedge de fluxo de caixa. Parece o mesmo em muitos casos. Você pode lançar alguma luz lá? "
Que tipos de cobertura temos?
Embora eu explique claramente uma contabilidade de cobertura em detalhes no meu Kit IFRS, deixe-me explicar em breve o tipo de hedges que temos:
Cobertura de valor justo; Hedge de fluxo de caixa e hedge de um investimento líquido em uma operação no exterior - mas não vamos lidar com este aqui, pois é quase a mesma mecânica que um hedge de fluxo de caixa.
Primeiro, vamos explicar o básico.
O que é um Hedge de valor justo?
O hedge de justo valor é uma cobertura da exposição a variações no valor justo de um ativo ou passivo reconhecido ou compromisso firme não reconhecido, ou um componente de tal item, que é atribuível a um risco particular e pode afetar o lucro ou a perda.
Essa é a definição no IFRS 9 e IAS 39.
Então, aqui, você tem algum "item fixo" e está preocupado que seu valor flutuará com o mercado. Eu voltarei para isso mais tarde.
Como contabilizar uma cobertura de valor justo?
OK, não vamos entrar em detalhes e vamos apenas assumir que sua cobertura de valor justo atende a todos os critérios para a contabilidade de hedge.
Nesse caso, você precisa fazer as seguintes etapas:
Determine o valor justo de seu item coberto e instrumento de hedge na data de relato; Passo 2:
Reconheça qualquer alteração no valor justo (ganho ou perda) no instrumento de hedge no resultado (na maioria dos casos).
Você precisa fazer o mesmo na maioria dos casos mesmo se você não aplicar a contabilidade de hedge, porque você precisa medir todos os derivativos (seus instrumentos de hedge) ao valor justo de qualquer maneira. Etapa 3:
Reconheça o ganho ou perda de hedge no item coberto em seu valor contábil.
Para resumir as entradas contábeis para uma cobertura de valor justo:
Nota: P / L = lucro ou perda, FP = demonstração da posição financeira.
O que é um hedge de fluxo de caixa?
O hedge de fluxo de caixa é uma cobertura da exposição à variabilidade nos fluxos de caixa que é atribuível a um risco específico associado a todos ou a um componente de um ativo ou passivo reconhecido ou a uma transação prevista altamente provável e pode afetar o lucro ou a perda.
Again, that’s the definition in IAS 39 and IFRS 9.
Here, you have some ” variable item ” and you’re worried that you might get less money or have to pay more money in the future than now.
Equally, you can have a highly probable forecast transaction that hasn’t been recognized in your accounts yet.
How to Account for a Cash Flow Hedge?
Assuming your cash flow hedge meets all hedge accounting criteria, you’ll need to make the following steps:
Determine the gain or loss on your hedging instrument and hedge item at the reporting date; Passo 2:
Calculate the effective and ineffective portions of the gain or loss on the hedging instrument; Step 3:
Recognize the effective portion of the gain or loss on the hedging instrument in other comprehensive income (OCI). This item in OCI will be called “Cash flow hedge reserve” in OCI. Step 4:
Recognize the ineffective portion of the gain or loss on the hedging instrument in profit or loss. Step 5:
Deal with a cash flow hedge reserve when necessary. You would do this step basically when the hedged expected future cash flows affect profit or loss, or when a hedged forecast transaction occurs – but let’s not go in details here, as it’s all covered in the IFRS Kit.
To sum up the accounting entries for a cash flow hedge :
Note: P/L = profit or loss, FP = statement of financial position, OCI = other comprehensive income.
As you can see, you don’t even touch the hedged item here and you only deal with the hedging instrument. So that’s completely different from fair value hedge accounting.
How to Distinguish Fair Value Hedge and Cash Flow Hedge?
What I’m going to explain right now is my own logic of looking at this issue. It’s not covered in any book.
It’s how I look at most hedging transactions and this is a very simplified view. But maybe it opens up your mind to logical thinking about hedges.
Please, ask first:
What kind of item are we hedging?
Basically, you can hedge a fixed item or a variable item.
Hedging a Fixed Item.
A fixed item means that the item has a fixed value in your accounts and it may provide or require fixed amount of cash in the future.
The same applies for unrecognized firm commitments that have not been sitting in your accounts yet, but they will be in the future.
And when it comes to hedging fixed items , then you’re practically dealing with the fair value hedge .
Well, here, you are worried, that in the future, you would be paying or receiving a different amount than the market or fair value will be. So you don’t want to FIX the amount, you want to GET or PAY exactly in line with the market.
I’m referring to “GET” or “PAY” only for the sake of simplicity. In fact, you don’t even need to get or pay anything in the future – you’re just worried that the item will have a different carrying amount in your books that its’ fair value.
Fair Value Hedge Example.
You issued some bonds with coupon 2% p. a.
It’s nice that you always know how much you’ll pay in the future.
BUT you are worried that in the future, market interest rate will be much lower than 2% and you will be overpaying (in other words, you could get the loan at much lower interest in the future than you will be paying at the fixed rate of 2%).
Therefore, you enter into interest rate swap to receive 2% fixed / pay LIBOR12M + 0.5%. This is a fair value hedge – you tied the fair value of your interest payments to market rates.
Hedging a Variable Item.
A variable item means that the expected future cash flows from this item change as a result of certain risk exposure, for example, variable interest rates or foreign currencies.
When it comes to hedging variable items, you’re practically speaking of a cash flow hedge .
Here, you are worried that you will get or pay a different amount of money in certain currency in the future that you would get now.
In fact, in a cash flow hedge, you want to FIX the amount of money you’ll get or pay – so that this amount would be the same NOW and IN THE FUTURE.
Cash Flow Hedge Example.
You issued some bonds with coupon LIBOR 12M+0.5%.
It means that in the future, you will pay interest in line with the market, because LIBOR reflects the market conditions.
MAS & # 8211; you don’t want to pay in line with market. You want to know how much you will pay in the future, as you need to make some budget, etc.
Therefore you enter into interest rate swap to receive LIBOR 12 M + 0.5% / pay 2% fixed. This is cash flow hedge – you fixed your cash flows and you will always pay 2%.
To Sum This All Up.
Now you can see that the same derivative – interest rate swap – can be a hedging instrument in a cash flow hedge as well as in a fair value hedge.
The key to differentiate is WHAT RISK you hedge . Always ask yourself, why you undertake the hedging instrument.
But it’s not that simple as it seems because there are some exceptions in IAS 39 and IFRS 9.
For example, even when you have a fixed item, you can still hedge it under cash flow hedge and protect it against foreign currency risk.
Equally, you can hedge a variable rate debt against fair value changes – and that’s the fair value hedge.
Therefore, please refer to the following table summarizing the types of hedges according to risks and items hedged:
Now, I’d like to hear from you. Please leave me a comment and let me know whether you have dealt with some hedge accounting in practice, what issues you faced and how you solved them. Obrigado!
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196 Comments.
thank you for this. we do foreign currency forwards at the year-end, cause we buy in usd. but they are short-term and we don’t book them as hedges. is it wrong?
Hi Anilla, no, it’s OK. Hedge accounting is OPTIONAL, not obligatory. So if you prefer to keep it simple, it’s OK to revalue your forwards to fair value and that’s it. Mainly when the forwards expire within some short term. S.
hi silvia, is the posting of the ineffective portion a balancing figure ? oomesh from mauritius.
Hi, Oomesh, yes, basically it is. The gain or loss from change in FV of hedging instrument = effective portion (to OCI) + ineffective portion (to P/L). Take care! S.
Just wanted to ask what is the specific difference in hedge accounting between Cash flow hedge and Fair value Hedge.
Mayur, please revise the 2 tables above where you can see the tables with journal entries for both hedges. But the main difference is, that at CF hedge you don’t touch the hedged item and you revalue only hedging instrument + you need to split the gain/loss to effective and ineffective portion+effective goes to OCI and ineffective to P/L.
At FV hedge, you revalue both hedging instrument and hedged item and if the hedge is effective, you put gain/loss from both elements to P/L.
m c. a finalist n m finding it quite difficult to learn about how derivatives and hedging work and about their definition and accounting treatments in the light of ifrs. please help me out if u have easy to understand easy material on mentioned topics.
yes, I have an easy-to-understand material about hedging, however, it is included in the IFRS Kit ifrsbox/ifrs-kit.
in this case with short term forward agreements classified as CF hedge what will be the accounting entries? I will go for a forward agreement for 21 days to buy a fixed amount of USD (functional currency is RSD) in order to pay for the acquisition of a PPE (I know the exact amount of this order). How can I record the loss calculated for this agreement as being the difference between spot rate and the actual exchange rate at the settlement date? Muito Obrigado.
hi Silvia, thnks , I did P2 in 2018 in quite forgotten some bits , thanks once again . this is a very challenging IFRS ! BEST REGARDS . OOMESH .
Thanks Sylvia. . Difficult subject matter well explained.
Thank you very much Silvia. When are you going to take us through Hedge of net investment in a foreign operation in this manner?
Hi James, well, I did not want to cover it here, because once you see this type of a hedge, you can clearly identify it – there’s no doubt about the type of the hedge 🙂 But I’ll do it. The thing is that not many people are interested in this topic, because that type of hedge is taken mostly by bigger companies or corporations and some IFRS expert solves it for them 🙂 S.
Kindly explain the meaning of effective and ineffective portion as I m unable to understand it.
Effectiveness is the measure that how successfully hedging instrument has covered the fluctuation in hedged item.
Have a following doubt.
If company has issued foreign currency fixed interest rate bond than and to hedge currency risk and interest rate risk it has undertaken cross currency interest rate swap than can this hedge be qualified for both fair value hedge (for interest rate movements) and cash flow hedge (for cross currency movements).
If yes than this hedge will be subject to cashflow hedge accounting treatment for currency movements and fair value hedge accounting treatment for interest rate movements.
Hello, Mayur, this is a great and interesting question.
The answer depends on the construction of the hedging relationship, but to make it short: what you described is totally doable. If your CCIRS (cross-currency interest rate swap) is constructed in a way that currency risk element is separable from interest rate risk element, and if these two elements can be separated and measured separately also for your fixed interest rate bond, then you can do it. You just need to designate it in your hedging strategy that way.
I have seen that CCIRS can be used in various types of hedges, for example, pure cash flow hedge (if swap is fixed for fixed, just in a different currency), also pure FV hedge (fixed for floating). By the way, if you want to keep your life easier, you can designate your hedge as CF or FV only, depending on the type and conditions of CCIRS. Tenha um bom dia! S.
Thank you Silvia for the explanations above , i have one question , can we have a fair value hedge against a Fixed rate bond classified At Amortized cost” to hedge the interest rate risk ?
Sim você pode. In that case, any hedge adjustment is amortised to profit or loss based on a recalculated effective interest rate – so not right away to P/L. S.
when fair value adjustments are amortized to p/l, isn’t there still the problem that financial statements do not represent the effect of an entity’s risk management? (when only the amortized volume is recognized in p/l for a period?)
Thanks in advance and kind regards, Janni.
Eu não penso assim. When you keep an asset at FVTPL, then you put all the difference from revaluation in P/L at once, you do NOT “amortize it” over time. S.
Thank you very much Silvia,
Bank A (Subsidiary) in 2006 started to use Interest Rate Swaps - The Bank A pays fix and.
receives variable interest rates from Bank B (Parent). The main purpose of these instruments is to mitigate the interest rate risk associated to the fixed rate lending (difference between loans – deposits)
For two years (2006&2007) Bank A recognized in Income Statement: Expenses in IRS SWAP and Income from SWAP.
In 2008 Bank A recognized Negative fair value financial derivative instruments through profit or loss.
Please can you help in question below:
• According IFRS is allowed Subsidiary to use Interest Rate Swaps with Parent (Related Party)
• Is correct to recognized Negative fair value financial derivative instruments through profit or loss.
• Can you help how to calculate fair value for Interest Rate Swaps.
Muito obrigado,
OK, let me go straight to your questions:
1) Yes, IRS can be arranged between 2 related parties. But in this case you need to make appropriate disclosures and also, you need to be careful because IRS between related parties are not necessarily arranged at market conditions (=fair values) and as a result, you would need to make appropriate adjustment to bring it to the fair value. Maybe it’s not your case though.
2) Of course. Is it officially designated and treated as a cash flow hedge? Because if not, then you don’t have any other choice but to recognize all gains or losses from derivative in profit or loss.
3) This is much more complex topic. I have covered it in my IFRS Kit where I show how to calculate the fair value of plain vanilla interest rate swap (same currency, fixed for floating). However, the calculation of IRS’s fair value depends on HOW exactly it is constructed and may require complex modelling.
Tenha um bom dia!
Thank you very much Silvia,
Just to clarify,
How should Bank A classify type of hedge in this scenario?
(Bank A (Subsidiary) use Interest Rate Swaps - The Bank A pays fix and.
receives variable interest rates from Bank B (Parent).)
Cash flow hedge or.
Fair value hedge.
I sincerely appreciate the time you spent in my issue.
That would be a cash flow hedge for the bank A. If the swap is opposite (A pays floating, receives fixed), then it’s a fair value hedge. S.
Wrt your reply to Visar, wont it be a FV hedge if Bank A is paying fixed as per your initial examples as the Swap is the hedging instrument in this case.
Yes, Amit, that’s what I wrote above.
Sorry, but I think I didn’t frame my question correctly earlier. If bank A is paying fixed that means it has a variable rate liability which it is hedging. So as per the example given under CF hedge above this should qualify under CF hedge for Bank A.
Hi Amit, my head turns around now 😀
You see, it’s usually not that easy to realize what risk we’re hedging.
Hedged item = variable-rate loan.
Hedging instrument = IRS with pay fixed, receive variable => then pay variable receive variable cancel out, so we’re left with pay fixed. Which is CF hedge as we’re fixing the amount of cash to pay. Hope it’s clear now 🙂
Thank you very much Silvia,
Can you tell me how many types of risks are there for which hedging can be done. As per me there are four risks– market price risk, interest rate risk, credit risk and foreign currency risk.
In my view hedging for FX Risk, Interest Rate Risk and Credit Risk (limited) can be done by hedging. Other components of Market Risk due to macroeconomic scenarios can be managed by diversification.
Very helpful article and thanks for explaining such a complex area in a very simple manner.
I understand that when a company goes for fair value hedge accounting, they take the accounting priviledge on the hedged item unlike a cash flow hedge where the same is taken on the hedging instrument.
I have couple of questions;
1. Can a fair value hedge be applied to Available for Sale securities? If yes then do we take the FV changes to P/L instead of OCI?
2. When I am entering into a FV hedge for a fixed rate debt (as mentioned in your example), I understand we do a fair valuation of the interest component for the debt (since FV of debt might also include other variable factors like credit risk, liquidity risk etc). In such case do I split the FV component and show them separately from the host debt contract?
Muito obrigado antecipadamente.
I have an ACCA P2 exam in December 2018 and I’m a bit confused with all these changes lately, so my q is: which standard we should refer to when dealing with financial instruments in our exams, IFRS 9 or IAS 39?
Agradeço antecipadamente.
Hi Nena, don’t worry about this, you will be told in the question what to use. If not, and the accounting treatment in IAS 39 is different from IFRS 9, then simply make your choice and don’t forget to write it clearly in your answer. Remember that ACCA examiners give marks for stating the obvious, so do it 🙂 S.
Thanks silvia, the topic is explained in a perfect manner. Was very helpful and interesting.
Silvia. I am doing a college assignment. in notes of a financial statement by a company i saw this statement.
“Hedging reserve we have relates to the effective portion of the cumulative net change in the fair value of cash flow hedges related to hedged transactions that have not yet occurred”.
Can you please tell me what type of hedging reserve this is? i find it a bit confusing. it would be highly appreciated if you could give me an answer today or tomorrow as my assignment is due tomorrow.
Agradeço antecipadamente.
Well, when you account for cash flow hedges, then you calculate effective and ineffective portion of FV change in your hedging instrument. The ineffective portion is recognized in P/L and the effective portion in OCI. This effective portion in OCI is then called “hedging reserve” & # 8211; hope that’s clearer. S.
Thanks a lot Silvia.
it really helped. can you tell me the difference between hedging reserve and share premium… i know its different but still need some point.
For a fair value hedge using an interest rate swap to hedge corporate bonds, do the notional values of the swap and the bond(s) have to be the same? Do the terms of the swap and the corporate bonds have to be the same?
IAS 39/IFRS 9 do not state this requirement. Notional values can be different, but in such a case, you’ll have a harder time to prove that your hedge is effective and qualifies for hedge accounting (as the terms in your hedged item and hedging instruments do not match). But I don’t say it’s impossible. S.
Lucid explanations to explain the hedge treatment. Obrigado.
However am not sure what type of hedge would i classify a currency forward to hedge a payment for acquiring a fixed asset in future (the currency in which the payment is made is different from the functional currency). The purchase of fixed asset is committed hence I could call this unrecognized firm committment (hedged item) and the risk hedged is the foreign currency. Looking at your table where you have summarized the types of hedges it looks like we could use both Cashflow hedges or Fair value hedges which seems to be a bit confusing. Can you please clarify this.
it depends on what you hedge. Por exemplo:
1) If you know your machine will cost the exact amount in the foreign currency in the future, and you want to protect just against foreign currency rate movements, then you can treat as a cash flow hedge.
2) If you’re not sure about the future price of your machine and you’re afraid of the price increase in the foreign currency, then it’s basically fair value hedge.
And there are lots of combinations, too. Hope it’s clearer! S.
Thanks for the clarifications. Yes the purchase price payable is fixed in foreign currency. Since the amount payable is fixed in foreign currency, since we are dealing with fixed item i pretty much concluded that we are dealing with the fair value hedge. Shouldnt this be the case? Are we talking about exceptions here? Por favor deixe-me saber.
the thing with unrecognized firm commitments is that IAS 39 permits to hedge foreign currency risk under both fair value and cash flow hedge.
Above, I suggested to treat it as a cash flow hedge, because in your case, the amount to pay in the foreign currency is fixed – that’s true, but in fact, the amount to pay in your own currency is variable as it fluctuates with the changes in the foreign exchange rates. It’s very similar to typical receivable or payable.
But as I wrote, IAS 39 allows you to account for hedge of unrecognized firm commitment under both types of hedges.
With reasons can you explain whether hedging reserve is a distributable reserve or non distributable reserve?
it would be highly appreciated if you could give me an answer today.
Agradeço antecipadamente.
Non-distributable. At some point in the future, it will reverse in P/L. S.
Thanks for the clarifications. I understand this much better now. I assume in such cases that there are no advantages in using a particular type of hedge accounting. If you think there is there an advantage in using a particular type of hedge accounting, can you explain with the reasons.
We are an European country (EUR) and we have a contract in Middle East (AED) for the next 5 years (long term), so our risk is a foreign currency risk, thus, Should we do a cash flow hedge better than fair valur hedge?
Are there some “clues” to identify the choice (FV hedge or CF hedge) in this kind of situations? Por exemplo:
- & gt; Contracts > 1 year or.
You recommend to work with CF hedge btter than FV hedge…
How to determine the effective and ineffective portion of cash flow hedge.
I have same question.
OK, let me reply, although it’s not really a topic to cover in 1 comment:
You simply need to compare the change in FV of your hedged item and the change in FV of your hedging instrument (in CF hedges).
Let’s say change in FV of hedging instrument is +100, and change in FV of hedged item is -90. It means that this hedge is not perfectly effective (in such a case, change in FV of hedging instrument would be 90 and there would be 100% offset). However, percentage of offsetting is 111% (100/90) which is very effective.
Now, the effective part of change in FV of hedging instrument is then 90, and ineffective part is 10 (100-90).
Is it clear, guys? 😉
Thanks a lot Silvia, really appreciate it. I guess its more clear now. But what if it was the other way round? Change in FV of Hedging instrument was +90, and change in FV of Hedge item was -100.. Then what will we do?
Thanks again for your help 🙂
above, I described “over-hedge”. Here, you described “under-hedge”.
In CF hedges, if there’s under-hedge, then there’s no ineffective portion and you should take all the change in FV of hedging instrument to OCI.
If there’s over-hedge in CF hedge, then you split change in FV of hedging instrument to effective and ineffective portion just as I described above.
Hope it’s clearer now. S.
Very helpful article and thanks for explaining such a complex area in a very simple manner. It would be great if you can clear my dobut. I had asked this before and guess it was missed.
I understand that when a company goes for fair value hedge accounting, they take the accounting priviledge on the hedged item unlike a cash flow hedge where the same is taken on the hedging instrument.
I have couple of questions;
1. Can a fair value hedge be applied to Available for Sale securities? If yes then do we take the FV changes to P/L instead of OCI?
2. When I am entering into a FV hedge for a fixed rate debt (as mentioned in your example), I understand we do a fair valuation of the interest component for the debt (since FV of debt might also include other variable factors like credit risk, liquidity risk etc). In such case do I split the FV component and show them separately from the host debt contract?
Muito obrigado antecipadamente.
Hi Silvia, thanks for being helpful and so clear! In the case of a variable rate bond, why would a fair value hedge be needed? Since by its very nature, a variable rate bond would be at fair value.
Would appreciate your insights on this…
We’re an importer of raw materials and pay the same in USD. We use FOB Shipping point terms. To hedge against the volatility of Forex we entered into a Forward contract to ensure that we already have a fixed amount of local currency equivalent to pay for the obligation. How should be clasifty this transaction? What are our proposed entries to record this transaction? Should we recognize the RM at the forward rate amount or the FOB date forex.
Thanks in advance and hope you can help us.
Hi Silvia. Your explanation is great. However, there’s one thing I’d like to ask. If the an entity’s commitment fixed only the quantity and date of the purchase while the price is fixed on a certain benchmark, is it still considered as firm commitment and should apply fair value hedge?
I have a question regarding the hedge relationships, from a banks perspective,
lets say a bank provides a interest rate gurantee on a mortgage for a period of 6 months. To reduce the risk that the bank is exposed to, the bank begins to economically hedge the risk via derivatives.
Based on this information – would this be a fair value hedge relationship? the hedge item is the fixed interest rate? or would the hedge item be the potential variable interest rate to be received when the customer funds their mortgage?
For me it seems like it is a fair value hedge, meaning that the hedged item is a “fixed-rate” interest rate.
What about commodity price hedge this i suppose also can be either cash flow or fair value hedge. In this case the FV of the hedged instrument will be the unrealised gain or loss as per the broker statement but what about the gain or loss of the hedged item? Will this be the same?
Eg customer wants to buy aluminium for USD 2K on 7th Jan and so supplier hedged the same quantity of aluminium at USD 2K on same date on 7th Jan. Broker statement will be USD 10 loss, so will this also represent the gain or loss on the hedged item and hence no entry will be passed? Com antecedência.
it really depends on the type of the hedge.
If you have a fair value hedge, then you book both FV gain/loss on hedging instrument and FV loss/gain on hedged item.
In a cash flow hedge, you need to measure effective/ineffective portion of the loss/gain on hedging instrument and if the hedge is still effective, you book ineffective part in P/L and effective part in OCI.
If I understand it correctly, the supplier holds aluminium for its client and contract’s price is fixed, so is supplier hedging the fair value of its inventories of aluminium? If yes, then it’s FV hedge.
i found some materials that the change in fair value of hedge instrument was discounted. i. e. discount period from closing date till settlement date.
my question is: when and/or what type of hedge do we use discounting the changes of FV?
obrigado. would be very helpful.
Awesome explanation – Muito obrigado. Wonder if the predictability of the expected future cash flow is a required for the hedge accounting at inception. Say I am buying Foreign inventory payable in their currency and then If I as a practice keep taking different maturities of hedges to settle that due. My question is only after i purchase that inventory should I take that hedge can I use the hedge accounting or is it just the predictability of the forecasted purchase to offset my currency exposure (variable here). I am assuming that this is cash flow hedge.
Thank you – I stumbled upon your resource – its brilliant.
You can hedge highly probable forecast transactions – this would be your case. You don’t have to purchase the inventory in order to hedge, but the transaction must be highly probable. And yes, that would be a cash flow hedge.
Hi Silvia. In relation to an investment in a foreign currency, does the hedge term have to meet the expected life of the investment. If so, what would occur if you cannot get a hedge to match the expected life of the asset, or if there was no defined term for the life of the asset, eg if you were buying property.
Hi Tony, not necessarily. If you can demonstrate that the hedge will still be effective and meets its objective, then OK. But in this case, it is very probable that there will be some ineffectiveness in the hedge, caused by different “maturity periods” of hedging instrument and hedged item. S.
Nice reading about Hedge Accounting, please help me to have better understanding, i want to ask you that:
1.how to calculate hedge effectiveness at the first cut off reporting period, because we just start to calculate the fair value and there is no changes in fair value movement?
2.how to calculate the ineffective portion? For example when the calculation set at 130%,is it only the portion amount of 130%-120% will be charge at Profit and Loss?
3.for fair value hedge at the perfectly match of Hedge Items versus Hedge Instruments, is it always perfectly offsetting in Profit and Loss between changes in Fair value of Hedge Instruments and Hedge Items?
4.in a very fluctuative exchange rate conditions, our company set several CCIRS transactions where our Hedge items is bank loan, the main problem is that our on balance sheet hedge items revaluated at each reporting period and then the net settlement from CCIRS also resulting a foreign exchange exposure due to different between book rate compare to spot rate when we receive or pay the CCIRS, is it my accounting treatment is not proper?
5. For a perfectly match condition of Hedge Items versus Hedge Instruments, can we only applied for critical match method for hedge accounting?
I would like to thanks in advance for your favourable reply.
Needed a clarification:-
In case a Co whose reporting currency is INR & has fx risk on account of export receivables in USD, has a fixed rate debt issued in INR in its books.
The Co intends to swap this INR debt with a CCIRS where it receives fixed rate INR Interest & pays floating libor USD. On the final prinicipal exchange it receives INR & pays USD.
Through this the Co intends to naturally offset USD payment against its forecast receivables in USD.
Can this CCIRS be put into a cash flow hedge against highly probable forecast exports? The following issues may arise:-
1)Through the swap I am converting a fixed liability into floating which will require fair value hedge accounting.
2) The risk being hedged is fx risk for forecast trnsaction which will require cash flow hedge accounting.
3) At the time of taking the swap, the INR debt in the books has no risk involved.
Your guidance on the same would be appreciated.
Thanks So Much Silvia. This Is “Hedge Accounting Made Easy”.
Please i really néed to get your IFRS KITS, but i need You to confirm to me the pricé and the last edition.
Specifically, does the newest édition of the IFRS KIT covers the completed version of IFRS 9- Financial Instruments.(i. e Released July 2018).
Please i need a response as urgent as possible.
Hi Oluwaseun, I’ve just responded by e-mail, but to answer: YES, the IFRS Kit does include the newest version of IFRS 9. S.
i want to know about use of cash flow at risk in intelligence hedging decision? can u help me plz.
Hi Silvia, thanks for such great explanation. I have been reading IAS 39, IFRS 7 and 9 and I still did not had an clear understanding between Fair Value and Cash Flow Hedge. I knew that I have to identify the risk, the hedge item, hedge instrument, strategy, economic relationship, effective and inefective portion and many other issues.
I work in treasury and am responsible for the follow up of financial instruments and their accounting/financial treatment. My industry is Coffee, a well known Commodity. So I will make up the context to you.
Hedge item: Arabica Coffee inventory bought at a fixed price.
Hedge instrument: Arabica Coffee Futures Contracts traded in Intercontinental Exchange (ICE, NY).
Economic relationship: the item is arabica coffee and the instrument is Arabica coffee futures. So the economic principle is very clear for me.
Strategy: Short Hedging for selling commodities.
Risk: possible decline price.
Action: when we buy the coffee in the cash market, we hedge the inventory doing the oposite in the futures market (Sell) and buying futures later (buy) when is time to sell.
We do not have risk on the buying side of coffee in cash market since, we buy on spot price always. We never buy on a forward or time in advance later. In the same day we make a purchase contract of coffee(1 lot 375 bags of 46 kg), we fix a buying price, and that is the entry price for us to enter the futures market and start the Short hedge by selling (1 lot 375 bags of 46kg) futures Arabica coffee contracts in the futures market. Giving us a short position on the futures market, and long position on the cash market.
Now, on the sell side, we do make forward contracts to deliver an exact amount of coffee (e. g. 5 lots) at an exact quality(High Grown European Preparation HG EP), exact time (shipment on May N15 July expiration month), and exact place (Port FOB). But we do not fix a price, so we call these forward contracts Price to be fix (PTBF).
Now, that I have explain you the context, I will get you to the big deal I have.
Our company is implementing IFRS Full for the first time on FY14. Our Auditors are Deloitte. On the previous year we have been using Local GAAP. (Which does not even know or recognize financial instruments accounting treatment other than ordinary Assets and Liabilities.
We have these Derivaties (Financial Instruments) and we use them as hedging instruments, both item and instrument are well defined as I have mentioned before. Now let´s try to find out if the hedge item is a Fix or Variable item.
You mentioned that inventories are Fix item. That is ok for inventories of items that are not listed on Exchanges. For example, cars, iPads, beds, shoes, etc. But for coffee, we have an active market (Level 1). The information of these prices are available for everyone and they are a common ordinary item. Nonetheless, commodity prices are very volatile, and prices can vary more than 100% in less than one year.
We can say we have a fix item on the buy side, but as I mentioned before we do not make commitments to buy on forward prices just spot prices. And we sell on PTBF that means our value of our sales are unknown, and so are the cash flows related to the income of our physical inventory of coffee.
My boss financial controller says that the inventories are an asset an therefore should be treated as a fair value hedge. The auditos initially wanted to treat the inventory with IAS 2, and Net realizable Value NRV. I do not agree. I have change auditors mind that commodity inventories should not be treated as NRV since the IAS 2 clear states it should be treated as Fair Value. That is ok if the inventories were not hedge. And since we do not like risk, and we want to offset market price risk, we use coffee futures to mitigate that risk.
If we had firm commitments or contracts that represent the sale of our inventory we could treat them as Fair value less cost to sell. But since we do not have a fix price, and we are hedging them, I think, understand and belief they should be treated as a Cash Flow Hedge.
To add more context, we do have the practice of making the mark-to-market valuation approach, which in other words represent fair value of inventories.
As we are hedging the inventory that Is ready for sale but with a PTBF contract, there should be an account that records the variation on fair value of the hedge item (lets call PNL of the inventorie) and should be recorded against a reserve of equity, called (Reserve of PNL of coffee inventory) although they are called PNL that does not mean I am saying the effects should be taken to P/L statement.
On the financial instrument (derivative)[by the way I read commodity contracts are not financial instruments how is that possible or when is it. ] And this should have an impact on its fair value depending on the market price. If prices goes down I will have an unrealized gain, and if prices go higher I will have an unrealized loss, ok? Because the futures market position is Short Hedge.
MY approach is the following.
Any variation of the hedge item and hedge instrument should be taken to :
Price Hedge item Dr. Cr.
Higher Gain Asset (Gain inventorie) Cash flow Reserve (Gain)
Lower Loss Cash Flow Reserve (Loss) Liabilitie (Loss)
Higher Loss OCI (Loss) Liabilitie (Loss)
Lower Gain Asset (Derivatie gain) OCI (Gain)
If the hedge is 100% effective, any ineffectiveness should be taken to Income statement for the FY of the change in price as the date of the FP.
We then arrive to the time to make the sell, and we have a known sell price.
Cash market (offset gain or loss on Cash Flow reserve Equity)
Future market (reclassify gain or loss to income statement when the price is know, and we buy the futures contract we had initially sold. That exit price will be my new fix price for the sale and the PTBF expires so I do not need any hedge since the market price risk have disappeared.
The main reason for these treatment I recall again, is the condition that I have a variable item hedge and not a fix variable hedge (coffee inventory).
Who makes more sense, me or my boss? Or the auditors?
thank you for your comment, and really let me thank you for your trust you placed in me and for posting me this question. However, to answer this question properly, I would need to dedicate more time than I currently can afford. I believe quick response would not give you the quality and diligence that everybody (also you) expect from my work.
Hence I leave it to other readers to go through your questions and tell you their opinion. When I have more time, I may eventually come back to it.
Hope you understand. S.
Hi Silvia, thanks for you explanation, very useful. Assuming a perfect hedge lets say either in the form of a cash flow hedge or fair value hedge. A fair value hedge will have zero FX impact because underlying is at same spot rate as hedge and they both mature at same rate. For cash flow hedges the spot will be taken in advance of the underlying being on your balance sheet so although they mature on the same date the initial value will be different and so FX gain/loss will be recognised. Is that a fair synopsis?
Hi Silvia, also as you mentioned “For example, even when you have a fixed item, you can still hedge it under cash flow hedge and protect it against foreign currency risk.
Equally, you can hedge a variable rate debt against fair value changes – and that’s the fair value hedge.”
In this example you said, we can hedge a variable debt against fair value changes and thats fair value hedge. This is exceptional, right. Can you please explain how are we hedging this?
Hello Silvia. Eu tenho uma pergunta. Is effectiveness or ineffectiveness only calculated in relation to cash flow hedging relationships or is it also applicable to fair value hedging relationship? Obrigado pelo seu tempo.
Every hedge must meet hedge effectiveness criteria in IFRS 9 in order to apply hedge accounting. If these are met, then you can apply hedge accounting, if not – then no hedge accounting.
However, hedge can me effective, but not perfectly effective.
Measuring “how much ineffectiveness” is applicable for cash flow hedge as you recognize ineffective portion in P/L and effective portion in OCI. For fair value hedges, you only need to determine whether your hedge is effective or not, but once your hedge meets effectiveness criteria, you do not measure effective and ineffective portion separately.
What is effective and ineffective portion, Please give a suitable example. |?
please revise the above comments, there’s a mention above. Also, I talk about these issues fully in my IFRS Kit. However, maybe in 1 of my future articles, I’ll bring simple illustration, too. Tenha um bom dia! S.
Iam still very confused when you still talk of IAS 39 yet my tutor told me that it was replaced long time ago by IFRS 9.
it’s just a partial truth. Today, there are 2 valid standards: IAS 39 and IFRS 9 and the companies can make a choice which one to apply. IAS 39 stops being valid after 1 January 2018 only, so from 2018, there will be only IFRS 9.
I also came across this ifrs box nd wow! You’re good at what you do.
Just a quick 1 though, hedge accounting for a basic FV hedge is exactly the same as normal accounting treatment of the hedging instrument and item. Cos I really don’t c the difference between when we apply hedge accounting and when we don’t?
Only difference comes with CF hedges.
Am I right in this!
Bem, na verdade não. FV hedge is a bit different from “normal” accounting treatment. Yes, it’s true, that for hedging instrument, you use some derivative in most cases and its fair value change is recognised in P/L anyway. But for the hedged item no. For example, if you hedge your inventories at FV, then you also recognise a change in FV of your hedge item (inventories), while normally, you keep your inventories at lower of cost or NRV (IAS 2).
Tenha um bom dia!
Crystal clear – obrigado!
What difference does it make whether you designate a fair value hedge or not, as far as I can see the movements in the values of the hedging instrument and the underlying item both go through the P&L irrespective of whether you designate or not.
that’s not true, please refer to my above comment. Some “hedged items” are not revalued through P/L without FV hedge (e. g. inventories). S.
Thank you for a very very useful web site. I would like to kindly ask a question.
What if the hedged item is already recognised receivable which is denominated in Dollar, where functional currency is Euro (FX forward is enterred). The movement in receivables due to FX rate change is already booked on P&L at reporting date. If FV hedge is applied, hedged item (in this case $ denominated receivables) fair value change will be booked twice in P%L (one for usual accounting entry, two for FV hedge accounting)?
if you designate your receivable for FV hedge (but I guess that it’s not what you want to do, because most of the time, you designate it for cash flow hedge really), then you do not book the change twice. As soon as you revalue receivable to the current year-end FX rate, it’s in its fair value, so there’s nothing to be booked within FV hedge. S.
Thank you so much Silvia for your very helpful and quick response.
Then, if you designate FX forward as CFH (assume 100% efficiency), net income will fluctuate until settlement of FX forward as change in fair value of FX forward will be booked to OCI under CFH accounting. And the revaluation of receivable/payable will be booked in P&L (they will not offset each other in the P&L until settlement).
After settlement of FX forward, amount in OCI will be reclassified to P&L and offset with the revaluation gain/loss from receivable/payable. Am I right thinking like that?
If this is the case, why would we want to apply Cash Flow Hedge for recorded assets/liabilities denominated in FX (receivables, payables, etc) which are revalued at period-ends? We can simply apply Economic Hedge (as change in fair value goes to P&L, it will offset with revaluation of hedged item) instead of Hedge Accounting, given that hedge accounting requires upfront documentation and testing?
I wanted to inquire whether I can hedge my Loan payable in USD with my Revenue which I will receive in USD?
Is that possible under IAS 39 and IFRS 9?
Wondering if you could clarify something…
My company have taken out CCIRS in GBP/USD and GBP/JPY.
We revalue these items (at fair value) every period in the STRGL (performing retrospective testing each period) and posting the changes accordingly in STGL. I presume this is correct methodology using IAS39?
How will the accounting change following IFR9 implementation? I presume no retrospective testing will be required and the change in fair value will need to be recognised in OCI?
Many thanks for clarifying.
you haven’t written whether your CCIRS is a designated hedging instrument or it’s just a derivative without any hedging relationship. You mentioned some retrospective testing, however, it’s not clear what you hedge, what the type of the hedge is etc.
If it’s not a part of some hedge, then of course, you’re right and IFRS 9 implementation won’t change it’s treatment.
If it’s a hedging instrument, then there are some differences in relation to testing the effectiveness, but the mechanics of accounting for a hedge itself does not change.
Hi Silvia, thanks for replying to questions like this. I wanted to know if the following is correct. A company has FX denominated loans and entered into forward contracts to cover the interest and principal payments. The accounting treatment: book and carry the loan in functional currency translated at the hedge contract rate/forward rate. The mark-to-market on the hedge contract sits on the balance sheet. When loan and hedge contract matures, the gain/loss on the hedge contract goes to update the Loan Payable account on the balance sheet. Not hitting P&L at all.. rationale is that once forward contract was entered into, this effectively turned the loan into functional currency….does this make sense? I’m used to traditional fair value hedge where remeasurement gain/loss is offset by hedge gain/loss on the P&L.
Hi Silvia, my client currently enter into future commodities contract to ‘short’ (sell) it purchases of commodities on the purchase date of the commodities and at the same time ‘Long’ (buy) the commodities when a sales contract is sign between the seller on the sales contract date. Then follow by the prompt date as dated by the future contract. The client will either settle earlier or at the prompt and make a gain / loss .
For example, purchase 100mts @ $1/mt of zinc on 1/1/2018 , buyer not finalised yet hence short(sell) it by entering into future contract at $1.10/mt and at a later date when a sales contract with customer A to sell zinc at $1.30/mts is signed with a customer on 3/1/2018, the client entered into a long (buy) future contract 100mts of zinc @ $1.20 with the future broker.
Hence the company made a future contract loss of ($1.20 x 100 – $1.10 x 100 = $10).
while in actual purchases and sales, the company made a profit of ($1.30 x 100 – $1 x 100 = $30).
The company will recognised the $10/- as hedging loss and this amount will be recognised directly into PL. The amount due to or due from the future brokers should be recognised into the FP as derivative financial assets / derivative financial liabilties. Is this the right way to account for hedging??
The future contract could also work in the opposite way such as entering in ‘Long’ (buy) future contract in regards to the sales contract signed and subsequently enter into ‘Short’ purchase contract.
The sales and purchases is only recognised when the goods is delivered and onto the FP and PL.
This should be designated as fair value hedge?
Wonder how you explain such complicated topics at ease. really appreciate.
Thanks 🙂 I just don’t like to be “lost in translation” 🙂
Can we get cash flow hedge for an interest rate swap agreement to manage 75% the risk of a variable debt. Meaning the notional amount on interest rate agreement is 75% of the value of the debt outstanding at the date interest rate swap agreement. Also can we get cash flow hedge for interest rate swap if the debt agreement was entered into on July 29, 2018 where as the interest date swap agreement was entered into on November 20, 2018. Does few months variance in the commencement matters?
“irrespective of the hedge type, hedge accounting essentially involves measurement of the hedging instrument at fair value, regardless of the accounting method used on the underlying hedged item.”
Esta afirmação é correta?
In banking, we offer fixed rate loans to borrowers and offset the interest rate risk by entering into an interest rate swap or fair value hedge. With the hedge, we pay a fixed rate payment and get a variable rate payment in return. With regards to reporting the change in fair value of the hedging instrument (the loan in this case), does this amount get added to the book balance of the loan or is it reported separately on the Balance Sheet as part of Other Assets. I understand the change in fair value of the hedge is reported as its own item on the Balance Sheet, just not sure if the fair value of the hedging instrument receives the same treatment.
how to Calculate the effective and ineffective portions of the gain or loss on the hedging instrument?
I would like to humbly ask you for your kind help since I have read most of articles here and didnt find the answer. 🙂
If inventory is hedged through FV hedge and the FV increases during the perioid till reporting date, is the value of inventory changed (increased) accordingly? Im just confused by IAS 2 and its “lower of cost or NRV” regra. Does it not apply here?
I will be forever grateful for your reply, this question is kind of preventing me from further understanding of whole hedge accounting.
Thank you1 Have a great day!
How to identify the ineffective portion of a hedging instrument practically. Can you give a short example to clarify the same under IFRS 9.
Good afternoon Silvia!
I have been searching internet for 2 months in a row and still didnt find answer for this:
What lines in P/L statement are affected by the change of the value of hedge item/instrument? Up till now, I have found 3 different ways in different books: to Financial income, operating income and to revenues.
Is it different for each hedging relationship? Or e. g. hedge of fair value of commodity inventory is always affects operating income.
Please help me! <3 My head is going to blow up soon.
it strongly depends on what your hedged item is 🙂 Then the change of fair value goes to the same line as the main expenses related to the hedged item. S.
Hi Silvia, Thanks a lot for the explanation. In our company we have hedged the foreign currency risk with forward contracts. Is this falling under fair value hedge? Can u please explain on this?
in most cases, it’s a cash flow risk when it comes to foreign currencies (e. g. you protect your receivables/payables in foreign currencies). But sometimes, it can be a fair value hedge, too. S.
Hi Silvia, Need a clarification.
We have a long term loan in USD and intend to re pay with the foreign exchange earning in the future. Could please let me know, which one is the hedge item, hedge instrument and the impact on the OCI when the settlement is made. Thanking you.
I think the difference is the certainty of cash flows. In cash flow hedge u r certain to receive or pay and u just protect from variation in that receipt or payment. In fair value hedge, there is no certainty in cash flow yet as the decision to hold or to sell and when to sell are still undecided. Is my logic right?…:)
How do you present cash hedging in the cash flow statements (investment or financing)? Is there a specific lingo I should use to add a line in the cash flow?
am also interested in knowing how to Calculate the effective and ineffective portions of the gain or loss on the hedging instrument?
I replied somewhere above in the comment. Plus, I noted you subscribed to the IFRS Kit – so you’ll find a clear explanation there. S.
In the search of how to write up a significant matter for my client’s new fair value hedge and came to this website.
Have to say, very helpful! Muito obrigado!
And, I have a laugh when reading your “Top 3 Biggest Dilemma with your auditors”
I experienced all of what you mentioned there before. Ri muito!
I am looking for material/subscription covering the following topics/Questions.
1)If I have a bond that is classified under Amortized cost, could I do hedging accounting i. e the bond to be hedged item (with examples)
2)examples for Method of hedge effectiveness calculating.
3)examples for hedging accounting under IFRS 9.
I am looking for material /subscription covering the Hengyang accounting with Examples especially for.
1)the treatment for hedging a bond that is classified under amortized cost (IFRS 9) or held to maturity (IAS 39)
2) examples for IAS 39.
Method of hedge effectiveness calculating.
1)dollar offset method.
2)volatility reduction method.
4)hypothetical derivatives method(for only cash flow)
Or rebalancing under IFRS 9.
Assume a scenario where I agree a fixed price for a defined quantity of crude oil, say USD90 for 10,000bbl of crude. The price of crude in the market is USD30 and I agreed to pay the Buyer USD3.50 for each barrel of crude lifted so as to guarantee the price. How do I treat this type of hedge? In my view this is as good as a cash and carry transaction. Do I need to recognize any gain from this type of forward contract since I have basically agreed to sell the crude at a fixed price?
The difference between Fair value & cash Flow Hedge is explained beautifully. I have one doubt in case of Cash Flow Hedge what will happen to Mark to Market(MTM) gain/Loss of an Investment (Hedged Item). Because as explained earlier, in cash flow hedge we do not touch Hedged Item in accounting??
I enter into a forward to hedge an expenses in future in one year and the invoices will be come in at that point of time.
I recorded it as cash flow hedge. Just when the forward contract is expire but the invoices haven’t come in and it sit under my accrual, is this call ineffective potion? need to charge out to PL?
I wonder i well i would have understood that area of Financial Instruments without your presentation Silvia. Adivinha ? It was succinct and simply simplified. Under how to account for a cash flow hedge you clearly stated “As you can see, you don’t even touch the hedged iten hear” Hahahahh…….That was pam. Obrigado e continue.
🙂 I wish everyone would read my stuff so carefully 🙂 S.
Say I’m going to receive $10million GBP as royalty payment from my subsidiary. However, as i’m a US company i would want to hedge this against a variable foreign exchange currency. Does this justifies to be a Cash flow hedge ?
I would say a cash flow hedge. S.
Another question is that, since i have entered into a forward contract (signed and sealed). Do I have to record it down as a transaction (E. g a Receivable) or should it be included in the notes of the financial statements?
Dear Philip, since this is a derivative, it should be recognized in the financial statements at fair value (although initially, the fair value usually comes close to zero). S.
I want to ask from you about Cash Flow Hedge reclassification to earnings.
we are in Travel industry and we sell out tour package to our subsidiary companies in other countries..we have forward contract with bank..
Initially, we recognize gain from hedging in other comprehensive income..
1. can we reclassify the gain from Hedging into earnings again ?
2.When we can make the reclassification.
Hi Silvia, thanks for the explanations. I just get confused on how to account for interest rate swaps with regards to hedging. Bank A is exposed to variable rate payments on their loan liabilities. They enter into a IRS with Bank B to pay fixed and receive variable.
1) This would be a CF hedge right?
2) What would be the difference if we apply hedge accounting and if we do not apply hedge accounting because I can’t see a difference – i. e under hedge accounting, the net amount between what we pay and what we receive will go to P+L (basically the non-effective portion). under normal accounting, we would still affect P+L with the net amount. So how does hedge accounting change this?
2) There are 2 things to take care about:
& # 8211; The interest paid: Sure, what you pay, is a part of the effective interest method and goes in profit or loss. I would say this is what happened in the past.
& # 8211; Interest rate swap itself: You shall recognize the derivative too. This is what will happen in the future (its fair value is calculated as present value of future cash flows). Initially, its fair value is close to zero, but in the subsequent reporting periods, it will have some fair value and you need to account also for fair value change. Here the hedge accounting comes.
If you do not apply a hedge accounting, then the full change in derivative’s fair value goes to profit or loss.
If you do apply a hedge accounting, then only ineffective portion of change in FV goes to profit or loss and the effective portion is recognized in OCI.
Espero que isto ajude. S.
i want to know, in case we have hedged most of the payments which we have to pay to supplier with bank. further to explain, bank first pay to supplier & then we pay to bank after 3 to 6 month of on forward contract rate, so is it necessary to calculate the unrealise gain/loss for loan from bank in foreign currency.
Shipra, I am a little lost in your question. You should calculate any unrealized gain/loss on any loan in foreign currencies stated in your financial statements. On top of that, if you enterred into a derivative (whether for hedge or not), then you should determine its fair value at the end of reporting period and recognize it. S.
I have an interest in the impact of FX movement for reporting purposes.
In most (if not all) of the examples you gave above, they would be deemed to be monetary items. A company that held such items in a foreign subsidiary may consider cashflow or fair value hedges depending on the item.
Would it be fair to say that a company wouldn’t need to worry about FX movements for non-monetary items such as plant and equipment in a foreign subsidiary, as they would be converted to reporting currency at an historic rate?
in fact, when you translate foreign subsidiary’s accounts to a presentation currency for the reporting purposes, then you do NOT use historical rate, but the closing rate. You use historical rate for non-monetary assets only when you translate individual transactions to your functional currency (careful about what you translate: to a presentation currency? to a functional currency?). Of course, when you translate subsidiary’s functional currency accounts to parent’s functional currency (i. e. to a presentation currency), there are many exchange differences and their cumulative effect is recognized in other comprehensive income.
And then, about hedging of non-monetary items – maybe it would be great if you specify further what you have in mind. Do you own some fixed asset and you’d like to hedge its value? Or would you like to hedge investor’s interest in net assets of foreign subsidiary?
If the last is the case, then you can hedge the net assets and apply a cash flow hedge, but only to the foreign exchange differences arising between parent’s functional currency and subsidiary’s functional currency. You can apply cash flow hedge accounting, but only in the consolidated financial statements.
It’s quite a difficult topic and I plan to write some article about it. S.
Thanks for the explanation. If we purchase your material will it have examples on effectiveness testing on cash flow hedges as per AASB139.
I have some questions regarding the designation and treatment of cash flow hedge for FX swap (funding swap) under IAS 39.
FX swap is a swap transaction exchange of principals of different currencies at the beginning and at maturity (i. e. convert USD to AUD at the beginning (near leg) and convert AUD to USD at the maturity (far leg)).
Initially, I would raise USD by issuing discounted bill and the USD received would be swapped to AUD to fund an asset. At the maturity, the AUD asset would be converted back to USD by swap for repayment of liabilities.
Between the value date of near leg and maturity date, I would have a USD Liability and a AUD asset in my balance sheet while the far leg of swap would be a derivative asset or liabilities like a forward fx contract.
Because the Asset and Liabilities would be revalued using spot FX rate and the far leg of FX swap would be remeasured based on forward FX rate, the non-parallel shifts of spot rate and swap rate would cause fluctuation of FX Profit. Therefore, I would like to use cash flow hedging to offset such fluctuation. (Namely, designate the discounted bill in USD as hedged item and the far leg of swap as hedging instrument and hedge on forward rate method)
For cash flow designation:
1. Should be hedged item be defined as a “Forecast” transaction or recognised liabilities?
2. Given the liability is a discounted bill, should the value of hedged item equal to the notional value to be paid at the end or the discounted value I received at beginning?
3. By using forward method Cash Flow Hedge, the value of far leg would be all transferred into OCI. Should I recycle the amount of realised FX Profit and Loss of hedged item (asset and liability) out of OCI and return back to P&L during the life of swap? If the answer is yes, which section in IAS 39 would require/allow me to do so?
We hedge our foreign currency receivable on forecasted sales/future sales against the creditors, here hedged item is forecasted sales and hedged instrument is creditor. Please note we dont enter into an any forward contract or future contract.
i. e. any foreign currency receivables in future is hedged against the amount payable to creditors in foreign currency.
We treat this as Cash Flow hedge. This example (we are actually doing this) not covered in any book. Isso é correto?
Hi Please I need clarification. I am having difficult establishing if a transaction I am working on is an hedging relationship.
I am currently reviewing the financials of a company which has an account designated as cashflow hedge reserve.
Now the entity buys raw material from foreign supplier and agrees times of payment which could be in 3 months. So my client sets aside some foreign currency amount in the bank( Eg EURO 15Million for the payment which will be due in say 3 months at an exchange rate of for example NGN250 per Euro on that day. So on the payment date the Euro I5 million is translated at the exchange rate of say NGN 300 per Euro and the exchange difference will now be recognized as cashflow hedge reserve.
My concern is that I am unable to identify a third party in this transaction. No one really bears the loss or reward of the transactions. Seems to me like is mere translation of foreign denominated monetary assets using the spot rate on the balance sheet date as required by IFRS.
Please assist to provide me with guidance on this as I am so confused.
Should we classify a foreign currency denominated fixed rate bond as a fair value hedge or cash flow hedge?
But if I expect it to be effective, I’d rather choose to do fair value?
It would go straight to benefit P&L.
Would like to check with you. If the Company is entered into Cross Currency Swap (applying hedge accounting, cash flow hedge and the hedge is effective). The loan which entered into the swap is different from the functional currency. Understand that the Fair Value of the derivative is taken up in Other Comprehensive Income, how about the spot rate translation of the loan itself? Should recognised in P&L or OCI?
thanks for all the detailed explanations!
I had a question which is more specific to commodity hedges – is the accounting at all affected if there is an asset lien? I am looking at a gas hedge for a power plant.
Also, does the US GAAP differ on this topic?
Hi Silvia, how does one think about hedging inventory that comprises gold jewellery, for example. Would this be a fixed hedge…and consequently, one has to adopt the Fair Value method?
Excelente postagem! Thank you for making it so simple.
I have two questions:
1. We do cash flow forecast of our foreign currency purchases. Example: we forecast purchase of 10 million EUR of raw material in May. 2017. Functional currency is USD.
If I want to hedge the future purchase with a FX forward contract in order to fix my margins (P/L), is this Cash Flow Hedge?
2. In May 2017 when I purchase this raw material, this 10 million EUR is A/P on my Balance Sheet with 45 days payment term.
I want to fix my A/P in USD so I hedge it with FX forward contract – Is this FV hedge?
Is there a major difference between GAAP and IFRS on hedge accounting?
2) No, it’s a cash flow hedge.
There are some differences, but probably not major. S.
If I take out a forward exchange contract to secure my exchange rate on a forecast transaction (for the purchase of inventory), I can obviously apply cash flow hedging.
However, once I receipt this inventory, I stop applying cash flow hedging. Does the hedge then become a fair value hedge or do I simply now account for this as a derivative instrument. I know the accounting treatment of a derivative and fair value hedge is the same, but want to understand the principle).
I think that by the forward contract, you are hedging the planned cash flows and the receipt of inventories is not an event that would force you to discontinue the hedge accounting. Instead, you keep your hedge accounting until you pay for the inventories and exercise the forward contract. In fact, you are not hedging the inventories themselves, but the payment for these inventories.
Also, let me stress that fair value hedge accounting and the accounting treatment of a derivative are NOT the same. Yes, in both cases, you recognize the fair value change of a derivative in profit or loss, but in the case of fair value hedge, you also recognize the fair value change of the hedged item in profit or loss. S.
Thanks a million for sharing such a fantastic explanation about the differentiation both of these hedge’s type. Please define & explain the followings:
1. Define Effective & Ineffective portion of Gain or Loss on Derivatives;
2. What is the basis, criteria or parameters for splitting of Gain or Loss into Effective & Ineffective portions of Hedging Instruments?
hmmm, this is really a complex question and I think I need to write some article about it. In short: when the change in fair value (FV) of hedging instrument is greater than the change in FV of hedged item, you have an “overhedge”. If it falls within the range of 80-125%, then the effective part is the FV change equals to FV change on hedged item, and ineffective part is the difference between FV change of hedging instrument and FV change on hedged item. It looks very complicated, but it’s not really possible to explain it easily in the comment. And also, it’s only the example of dollar-offset method, applied under IAS 39. S.
Firstly I thank you for replying my question. I made a flow chart presentation according to your comment still found very complicated. I would really appreciate if you write an article on this complex matter with numerical example for better understanding.
may your wish come true. I’lll write something up within 1-2 months. S.
Can you please also explain how to account for cross currency interest rate swaps (CCRIS).
I understand that fixed to fixed CCRIS are fixed interest payments in future and can be treated similar to forward contracts.
But how to account for floating to fixed CCIRS and vice versa and floating to floating CCRIS.
DO we apply hedge accounting these ?
that’s the topic for a separate article itself. Let me just mention that yes, it’s possible to apply hedge accounting to CCIRS, based on what the hedge relationship is. What is your hedged item? What precisely is your hedging instrument – is it the full CCIRS? Or a part of it? Also, can you measure hedge effectiveness somehow?
If you hold your CCIRS outside any hedging relationship, then no, you do not apply hedge accounting, but you should account for all fair value changes of that derivative in profit or loss. S.
The article is very helpful. Thanks for explaining complex topic in a simple way.
I have a doubt ;if I have two types of fixed debt instruments one I have amortised using EIR & the other I havenot amortised. Now I have entered in to fixed rate prinicipal & interest swap in foreign currency, whether the same will be cash flow hedge or fair value hedge ?
it depends on what risk you hedge. You need to specify that precisely. Are you protecting against foreign currency movements? Then it’s a cash flow hedge. Are you protecting against fair value movement (i. e. are you swapping fixed rate to get floating market rate)? Then it’s a fair value hedge. S.
Great article, thanks very much! I think I now am clear about fair value vs cash flow hedges. But now I see people speaking about balance sheet hedging vs cash flow hedging, and then things get muddled again. Is “balance sheet hedging” simply another way of referring to fair value hedging? Muito obrigado!
IFRS do not define the term “balance sheet hedging”, but in most cases it refers to protecting against the risk associated with foreign currency movements, related to your assets or liabilities denominated in foreign currency. In most cases, it’s a cash flow hedge. S.
Thank you for the explanation, Sylvia!
Can you tell me how to account for hedging for a portion of assets classified at Amortised cost.
The hedging insturment is as usual but noit sure how MTM is treated on the balance sheet and the P&L.(IFRS 9)
Sorry, what is MTM?
MTM is Mark to market.
It depends on what you are hedging. Is it the fair value hedge or a cash flow hedge?
Fair value hedge for Securities at Amortised cost(IFRS 9)
Would it be possible to designate a USD denominated loan as the “hedging instrument” to hedge highly probable forecast sales also denominated in USD. As far as I know, the answer is yes, as I am trying to hedge the FX exposure.
Trick here is, this loan has already been designated as the “hedged item” to be able to hedge the interest rate risk with an IRS earlier & the relationship is still ongoing.
Therefore, technically, I am trying to use the same loan as the “hedged item” in my first designation & “hedging instrument” in my second designation. I was wondering if this is a possible scenario.
Appreciated for this great article which helps me a lot to understand for about the topic. As I am a bit confused with the concept of hedge as I think to qualify as hedge the gain/loss on hedging instruments and on hedged items must be opposite (i. e. gain on hedging instrument vs loss on hedged item). Just wondering for a cash flow hedge, whether it is correct to deem the hedge as effective when there are gains on both hedging instrument and hedged items and the effectiveness is within the range of 80-125%, because for cash flow hedge we are just looking to hedge the variability of the cash flows. Many thanks Silvia.
Eu tenho uma pergunta.
Why the Gain/Loss on Fair value hedges booked in P&L, however in case of Cash flow hedges effective goes to OCI and ineffective goes to P&L.
Why this is happening if purpose of both is hedging ?
you forgot to add that at fair value hedge, also the gain/loss on the hedged item is booked (not in cash flow hedge). And it answers your question. It is happening to offset the fluctuations in fair value of the hedged item that are also recognized in P/L. S.
Eu tenho uma pergunta. If an entity is applying hedge accounting on a cash flow hedge and has hedged for sales of say 100,000 units of x commodity and then has forecasted sales of 90,000, are they required to recognised the g/l on the additional 10,000 units (over hedged?) in the P&L as opposed to the OCI?
Agradecimentos e cumprimentos
you should hedge only 90 000 of sales, not 100 000 units. The hedging instrument to hedge additional 10 000 units (that do not exist) should not be accounted for as a hedge accounting, but as a regular derivative. S.
In the example of accounting for fair value hedge given above, no hedge effectiveness testing has been included. Is it not compulsory to test hedge effectiveness for fair value hedges? If so, what could be the logic of keeping it mandatory for only cash flow hedges and not for fair value hedges? As far as I know, under US GAAP, hedge effectiveness testing is done for both fair value and cash flow hedges.
Thank you in advance for the clarification.
you should test the fair value hedge for the effectiveness. If it’s not effective, then under IAS 39 you need to discontinue the hedge accounting and under IFRS 9, you need to rebalance the hedge ration. If it’s effective, you account for it as written in the article – you don’t split the effective and ineffective part though. S.
hello Md. Silvia I watch your video a lot and you are very helpful.
please how come was the Variable-rate assets and liabilities classified under fair value in your text above.
What are the hedges we can use on securities (equities)FVH OR CFH OR BOTH…AND what should be our hedging instruments for this.
In case of fair value hedge, why there is no requirement for a reserve like that in cash flow hedge? Also, Why there is no distinction between effective / in-effective portion of hedge and separate accounting treatment in fair value hedge like that in cash-flow hedge? Request to clarify the logic.
it’s because in FV hedge, you revalue not only hedging instrument, but also a hedged item (this is not the case at CF hedge). Both items are revalued to their fair value, hence there’s no sense to apportion effective/ineffective part. S.
Thanks for explaining such a difficult topic so clearly.
But what happens if the swap is based on two floating interest,
for example: A bank pays 3M LIBOR and receives 1M LIBOR, which type of hedge it will be?
Currency swaps can be both cash flow hedge and fair value hedge.
I am not asking for a currency swap.
It is a basis swap, in which we swap the base on which the floating rates depends.
I have the same query as Neal.
Kindly answer this. TIA 🙂
It depends on what the hedged item is – for me, it’s very unclear from what Neal wrote. S.
Suppose X borrows @3M LIBOR and hedges it by an interest rate swap in which it receives 3M LIBOR and pays 1M LIBOR. So hedged item here is the 3M LIBOR. Is it the cash flow hegde or fair value hedge?
OK, nice but I understood that 🙂 Fine, let me tell you that this basis swap that exchanges one variability for another type of variability does not qualify for neither type of the hedge. So I’m afraid you could not account for a hedge accounting if you just took this type of a derivative. But, if you combine this swap with another derivative, well then, it could be possible to designate this combined item in either fair value hedge or cash flow hedge, depending on the specific circumstances. Felicidades!! 🙂
I have been studying theory but still I am not clear with the distinction of the two hedges. I got lost on the cash Flow hedge. What do you mean by effective portion and ineffective portion, Please help.
Thanks for your time and effort in all this.
I feel this ‘fixed’ and ‘variable’ rule does not always work. Like if an entity X has 100 Tons of cotton in its inventory and its enters into futures contract to sell this cotton in 3 months time @ 50$ per Ton. The way I see it that company has converted something variable into fixed, so it is cash flow hedge. Estou certo? And if it is fair value hedge, what am I doing wrong? Obrigado.
Pardon me, Tahir, but what’s the hedging here? I see only 1 contract – that is to sell the inventory in 3 months at fixed price. What’s the hedged item? And also, there’s also the question whether the delivery is physical, because if yes, then you don’t even have a derivative here, but the regular trading contract. S.
Hi Silvia, Entity entered into the contract to guard against the future fluctuations in the price of cotton (so that the value of its inventory does not fall), so inventory is hedged item. And lets assume contract can be net-settled. And thanks a lot.
Hi Silvia, waiting for your guidance.
Hedge of inventory in hand through a forward contract is accounted for as cash flow hedge of fair value hedge? Obrigado pelo seu tempo.
Fair value. In your books, it’s a fixed item.
If fair value hedge accounting requires adjustment of hedge item , particularly when fair value of hedge item increases , does this mean IAS 2 has no application when company uses fair value hedge accounting?
Hi silvia, so my question is :-
what would be the financial impact (if u had to sum it up) if the other comprehensive income/loss arising from cash flow hedges is to be reclassified to profit or loss account in the subsequent period. Hope to hear back soon as its very urgent! Obrigado 🙂
Thanks for the great article. If a hypothetical derivative is used to check effectiveness, should the hedged item still be used to calculate to ineffective portion that goes to P&L?
If it’s a cash flow hedge, yes. The hedge can be effective, but not 100% effective and it means that it will have some ineffective portion.
Great, thanks Silvia. Yes, it is a cashflow hedge. So I’ll check effectiveness using a hypothetical derivative and the hedging instrument. Then I’ll calculate the cumulative change of the hedging instrument and if it is more than the cumulative change of the hedging item, that excess portion is the ineffective portion that will go to P&L. Does this sound correct?
good afternoon, I’m working for an oil and service company and I have the following example:
we got an advance from a client(contract in dollar) in NAIRA equivalent at fix exchange rate. During 2018 NAIRA has been drastically devaluated and the equivalent amount of naira that we are getting from client against the advance is giving us a huge loss on the current year.
is it a sample where a cash flow edge have suppose to be applicable in order to minimize the impact on P&L?
I’m interested on the CVA/DVA impact on the cash flow hedge portion especially on recognizing the accounting entries that should goes to OCI. Would you be able to provide some insight and sample affecting this matter.
So here is my question, Suppose i have taken forward cover against my foreign currency receivable, so is it a cash flow hedge or fair value hedge?
Also if i have taken forward cover for an amount which is more than/less than my foreign currency receivable, then what will be the treatment of excess/short position taken?
Thank you for this useful link on hedge accounting.
I have a question I would like to ask you.
Do you think it is possible to achieve hedge accounting if we forward hedge against forecast debt, i. e. the underlying debt is not yet drawn, but anticipated to be drawn, so there is a risk of being overhedged, could we still achieve hedge accounting?
I saw you double entries for hedge item only for fair value hedge. For effective cashflow hedge, means there is not necessary to retranslate hedge item at closing rate and difference posted to P&L?
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