In August 2016, the Ministry of Finance issued the "Letter on Soliciting Opinions on Three Standards including Accounting Standards for Business Enterprises No. 22 - Recognition and Measurement of Financial Instruments (Revised) (Draft for Comments)", which Three standards including the "Accounting Standards for Business Enterprises No. 24 - Hedge Accounting (Revised) (Draft for Comments)" have conducted public opinion collection. In April 2017, the Ministry of Finance issued Accounting [2017] No. 9, and the new "Accounting Standards for Business Enterprises No. 24 - Hedge Accounting" (hereinafter referred to as the new standards) was officially launched. The new standards will be gradually implemented in batches in various types of listed companies and unlisted companies starting from January 1, 2018.

This article will conduct a detailed analysis of the updated parts of the new standards, take cash flow hedging as an example, and provide specific explanations from the perspective of accounting treatment combined with cases to provide the market with operational experience that can be used for reference.

Three major changes in the new standards

The new standards are consistent with the "International Financial Reporting Standard No. 9 - Financial Instruments" (IFRS9) issued by the International Accounting Standards Board in 2014 , broadened the scope of hedging instruments and hedged items, canceled the quantitative indicators and retrospective evaluation requirements for hedging effectiveness assessment, introduced a rebalancing mechanism, and made relevant provisions on the accounting treatment of option time value.

The scope of hedging becomes wider

In the old standards, the scope of hedging instruments was limited to derivatives such as forward foreign exchange contracts, options, futures, swaps, etc., and non-derivative financial Assets or non-derivative financial liabilities are used as hedging instruments to hedge only foreign exchange risk. In the new standards, the scope of hedging instruments has been expanded, allowing non-derivative financial instruments measured at fair value through current profits and losses to be designated as hedging instruments. In practice, it is rare for the purpose of hedging to purchase non-derivative instruments measured at fair value and whose changes are included in current profits and losses. However, if an enterprise uses funds to invest in instruments linked to commodities, the investment will This occurs when hedging the price risk of a commodity purchased in anticipation.

The new standards have also broadened the definition of hedged items. In addition to the recognized assets or liabilities, unrecognized firm commitments, highly likely expected transactions and net investments in overseas operations already included in the old standards, the risk components of non-financial items, aggregated risk exposures, projects are also added. group and net position. Among them, the risk component of a non-financial project refers to the change in fair value or cash flow caused by one or more specific risks (risk component) in the overall fair value or cash flow variable of the project. If the risk component can be measured reliably, , then it can be designated as a hedged item. Aggregated risk exposure refers to the risk exposure formed by the combination of risk exposures and derivative instruments that meet the conditions of the hedged project; project group refers to the portfolio management of a group of projects for risk management purposes. Each item (including item components) can be individually designated as a hedged item.

The effectiveness assessment is changed from "quantitative" to "qualitative"

When specifying a hedging relationship, the new standard adds that compared with the old standard, the enterprise must specify the hedging in a formal written document The content of the effectiveness assessment (the reasons for hedging ineffectiveness and the method for determining the hedging ratio, etc.) will no longer stipulate the quantitative standard of 80% to 125% for the hedging effectiveness assessment. From a qualitative perspective, the new standards focus on whether there is an economic relationship between the hedged item and the hedging instrument, and whether the value changes between the two change in opposite directions due to the same hedging risk. In addition, the hedging ratio should not reflect the imbalance in the relative weight of the hedged item and the hedging instrument, otherwise it may produce accounting results that are inconsistent with the hedging accounting objectives.

The relaxed effectiveness assessment is undoubtedly a major benefit to companies that plan to adopt new hedge accounting, and can reduce a large amount of work burden caused by effectiveness assessment. In the future, more accounting personnel will be required to understand the nature of the business and rely on professional judgment and estimates to evaluate whether the hedging relationship meets the relevant requirements for effectiveness.

Introducing a rebalancing mechanism

Under the old standards, if the hedging relationship no longer meets the requirements for hedging effectiveness (over-hedging or under-hedging), the company should terminate the hedging. period accounting. However, under the new standards, as long as the risk management objectives do not change and the enterprise can rebalance the hedging relationship to meet the requirements for hedging effectiveness again, hedging accounting can continue to be used.

Rebalancing refers to adjusting the number of hedged items or hedging instruments in an existing hedging relationship so that the hedging ratio can re-examine the hedging effectiveness requirements. The specific method is to first determine the ineffective part of the hedging, analyze the reasons for the ineffective part, and then update the written documents of the hedging relationship.

When the hedging instrument has expired, been sold, the contract has been terminated or has been exercised, hedging accounting shall be terminated. However, when a hedging instrument is extended or replaced by another hedging instrument, and the extension or replacement is an integral part of the risk management objectives stated in the enterprise's written documents, it will not be treated as the hedging instrument has expired or the contract has been terminated.

Accounting treatment of cash flow hedging

Basic concepts

Cash flow hedging refers to hedging the risk exposure of cash flow changes.

This change in cash flow arises from specific risks related to recognized assets or liabilities, anticipated transactions that are highly likely to occur, or components of the above projects, and will affect the enterprise's profit or loss, that is, the change in the fair value of the hedging instrument is delayed in recognition.

Confirmation of measurement

If the cash flow hedging meets the conditions for applying the hedging accounting method, the part of the gains or losses generated by the hedging instrument that is effective as a hedging shall be regarded as a cash flow hedge. Reserves shall be included in other comprehensive income; the part of the gains or losses generated by hedging instruments that are ineffective shall be included in the current profits and losses.

The amount of cash flow hedging reserves shall be handled in accordance with the following provisions:

First, the hedged item is an expected transaction, and the expected transaction will cause the enterprise to subsequently recognize a non-financial item assets or non-financial liabilities, or when the expected transaction of non-financial assets or non-financial liabilities forms a firm commitment applicable to fair value hedging accounting, the enterprise shall reduce the amount of cash flow hedging reserves originally recognized in other comprehensive income. Transferred out and included in the initial recognition amount of the asset or liability.

Second, for other cash flow hedging, the enterprise should transfer out the cash flow hedging reserve originally recognized in other comprehensive profits and losses during the same period when the hedged expected cash flow affects the profit and loss, and include it in the profit and loss. Current profit and loss.

Third, if the amount of cash flow hedging reserves recognized in other comprehensive profits and losses is a loss, and all or part of the loss is not expected to be made up in the future accounting period, the enterprise should make the loss when it is not expected to make up the loss. When the amount is estimated to be irreparable, the portion that is not expected to be compensated will be transferred out of other comprehensive profits and losses and included in the current profits and losses.

Case Analysis

Company A signed a rubber (12540,35.00,0.28%) purchase contract worth US$2 million with Thai Company B in February 2018. Delivery payment is expected The date is June 30, 2018. In order to avoid the risk of exchange rate fluctuations, Company A signed a 6-month forward foreign exchange purchase contract with Bank C in China the day after signing the contract. The agreed exchange rate was 1 US dollar = 6.45 RMB. On March 30, 2018, the spot exchange rate of the U.S. dollar was 1 U.S. dollar = 6.29 yuan; on June 30, the spot exchange rate of the U.S. dollar was 1 U.S. dollar = 6.62 yuan. Company A settled the forward contract on a net basis on June 30, 2018, and purchased rubber. Assuming that interest on funds and various transaction taxes and fees are not considered, the hedge meets the conditions for applying hedge accounting stipulated in the hedging standards. Company A's forward foreign exchange purchase is regarded as a cash flow hedging, and the accounting treatment is as follows:

Processing conclusion

Through the above cases, we can find that in cash flow hedging, cash flow The accounting treatment of hedging instruments has been changed, and the impact of changes in the fair value of hedging instruments during the holding period on the income statement has been deferred. After the assets and liabilities of the expected transaction are actually formed, the hedging gains and losses will be transferred to the assets and liabilities. The initial cost of the liability will be reflected in the current profit or loss when it is sold or disposed of in the future. The logic of hedge accounting is different from the conventional measurement methods of financial assets, inventories and other accounting accounts, and is an exception to relevant accounting standards.

With the popularization of international trade and the development of financial instruments, there will be an increasing need for production, processing and trading enterprises to use various options, futures, and swaps to manage foreign exchange risks, interest rate risks, and price risks. many. The new standard's lower application threshold and simplified effectiveness assessment have greatly improved the practicality of hedging business.