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Chapter 4
2.3 Overview of basic rules
FAIR VALUE CASH FLOW NET INVESTMENT
HEDGE HEDGE HEDGE
Hedge of the Hedge of the
exposure to
changes in fair exposure to Hedge used to
value of a variability in cash eliminate the risk
recognised asset or flows associated with
liability e.g. used to hedge fluctuations in the
against the risk value of a foreign
e.g. used to hedge associated with the investment due to
against the risk of a future interest movements in
change in the value exchange rates
of an asset such as payments on
inventory variable rate debt
Hedged item and Gain or loss on Both investment
hedging instrument hedging instrument and borrowing are
are measured at fair is recognised in translated at closing
value at each year OCI rate at each year
end end
When underlying
Changes in fair transaction affects Gains or losses on
value of both profit or loss, cash both items are
hedged item and flow hedge ends offset in OCI
hedging instrument and OCI entries are Any remaining gain
are recognised in transferred/ or loss from
profit or loss and recycled into profit ineffective part of
offset each other or loss hedge is recognised
in profit or loss
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