Gao Dun ACCA Bian Xiao 20 15 ACCA exam is about to begin, and we will announce the related contents of the exam as soon as possible. Please pay close attention to ACCA in Gao Dun, and wish you all a smooth pass in the ACCA exam. What I bring to you today is P2 knowledge point of ACCA exam: draft hedge accounting.

20 12 September, IASB issued a new draft of hedge accounting requirements, which will become a part of IFRS 9 financial instruments after being finalized.

The draft is an additional step in the due process of IASB, which has been included between the ed stage and IFRS 9. The purpose of this extra step is to allow:

Relevant parties review the suggestions and give feedback to IASB;

FASB has the opportunity to consider these suggestions; and

IASB will conduct additional research.

IASB has determined that the hedging requirements of IAS 39 are quite onerous and do not match the risk management policies pursued by many entities.

The proposal in the draft aims at simplifying the hedging requirements and allowing entities to hedge their inherent business risks.

1 hedging tool

The draft allows some non-derivative financial instruments measured at fair value through profit or loss to be classified as hedging instruments. This is rare in practice, but it may include investing in commodity-linked funds to hedge the price risk of predicting the purchase of the commodity.

If an entity uses an option contract as a hedging tool, the draft requires that the time value of the option should be accounted for through other comprehensive income rather than profit and loss. This will reduce the fluctuation of profit or loss.

When the spot component of a forward contract is designated as hedging, the change in fair value can be immediately recognized through profit or loss, or its impact can be deferred through other comprehensive income.

2 hedging items

The draft allows a specific risk of a non-financial item to be classified as a hedging item if the risk can be identified separately and measured reliably.

It also allows hedging items to include derivatives. According to IAS 39, this cannot be classified as a hedging item.

It also allows hedging of a group of projects or net positions. This will better reflect the risk management strategy followed by the entity.

The draft also allows equity investments that are set at fair value through other comprehensive income to be set as hedging items (both valid and invalid changes are recognized in other comprehensive income).

3 The draft of qualified hedging replaces the rather tedious effective test (80%–125%) with a more principle-based standard:

There should be an economic relationship between hedging tools and hedging projects;

The influence of credit risk should not dominate the value change caused by economic relations; and

The hedging ratio shall reflect the actual quantity of hedging instruments used to hedge the actual quantity of hedged items.

This new evaluation method is quite subjective and may need the support of quantitative and/or qualitative evaluation of economic relations.

4 hedge accounting

Cash flow hedging accounting will require that the cash flow reserve recognized in equity must offset the value of non-financial items when the forecast transaction leads to the recognition of non-financial items ("basis" adjustment). According to IAS 39, basis adjustment is one of the two options allowed.

The accounting of fair value hedging will remain the same as IAS 39.

This article is edited by ACCA in Gao Dun, please indicate the source.

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