Page 192 - SBR Integrated Workbook STUDENT S18-J19

Chapter 12

8.4 Cash flow hedge accounting

At the reporting date, an entity must assess whether the cash flow hedge has been
highly effective. If so, then normal accounting rules are over-ridden and cash flow
hedge accounting rules are applied instead.

Under a cash flow hedge, the hedging instrument is adjusted for the
changes in fair value that have arisen since the inception of the
hedge. No entries are posted in respect of the hedged item.

The gain or loss arising on the hedging instrument will be recorded in
other comprehensive income.

However if the gain or loss on the hedging instrument since the
inception of the hedge is greater than the loss or gain on the hedged
item then the excess gain or loss on the hedging instrument is
recognised in profit or loss.

Example 14

Cash flow hedge

On 1 July 20X1, Coffee buys inventories of oil for $12 million. By 1 October
20X1, these inventories had a fair value of $15 million. To protect its future
cash flows Coffee enters into futures contracts to sell the oil for $15 million in
six months’ time. The fair value of the futures contracts at inception was nil.

By 31 December 20X1, the fair value of the inventories had fallen to $14.1
million and the fair value of the futures contracts had risen to $1 million.

Explain how the above would be accounted for at 31 December 20X1 if
Coffee designated the above relationship as a cash flow hedge.

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