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HEDGING

Example 2 - FIXED INTEREST RATE SWAP

COMMENT

• IFRS 9.6.5.2 (b) states that a cash flow hedge is a hedge of the

exposure to variability in cash flows.

• As the loan was obtained at a fixed interest rate of 12%, the fixed rate
loan does not give rise to any fluctuations in cash flows since the

interest payments are fixed at 12%.

• As a result, Protea Ltd cannot designate the swap as a cash flow hedge

of future interest payments. The hedged risk is the risk that the fair

value of the loan will increase as market interest rates start to

decrease.

• Protea Ltd therefore designates the interest rate swap as a fair value

hedge of the loan even though the loan is not accounted for at fair

value when applying normal accounting principles (the loan is

accounted for at amortised cost).

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