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Chapter 4

Example 5

Under IAS 39 Financial Instruments: Recognition and Measurement, what
is the correct treatment of a fair value hedge?

A When the underlying transaction affects profit or loss, the hedge ends
and the OCI entries are recycled into profit or loss.

B The gain or loss on the hedging instrument (or the portion of it that is
deemed to be an effective hedge) is recognised in other comprehensive
income (OCI).

C Both the investment and the borrowing will be translated at closing rate at
each year end and gains or losses on both items should be offset in other
comprehensive income (OCI).

D The changes in fair value of both the hedged item and the hedging
instrument are recognised in profit or loss and will offset each other.

Solution

The answer is (D).

The other treatments relate to cash flow hedges and net investment hedges.

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