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Hedge accounting

Example 6

Which TWO of the following are conditions which must exist in order for
hedge accounting to be permitted under IAS 39 Financial Instruments:
Recognition and Measurement?

A There is formal designation and documentation of the hedging
relationship at the inception of the hedge.

B The hedge is expected to be at least 95% effective.

C The effectiveness of the hedge has to be verified by the entity's auditors.

D The hedge is assessed on an ongoing basis and has actually been
highly effective throughout the financial reporting periods for which it was
designated.

Solution

The answer is (A) and (D).

Conditions for hedge accounting to be permitted are:

 There is formal designation and documentation of the hedging
relationship at the inception of the hedge.

 The hedge is expected to be highly effective.

 The effectiveness of the hedge can be reliably measured.

 The hedge is assessed on an ongoing basis and has actually been
highly effective throughout the financial reporting periods for which it was
designated.

 (Cash flow hedges only) The forecast transaction that is the subject of
the hedge must be highly probable and must present an exposure to
variations in cash flows that could ultimately affect profit or loss.

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