Make no mistake here. If you incorrectly identify the type of the hedge, then your hedge accounting will go totally wrong. A few weeks ago I was giving a lecture about hedge accounting to the group of auditors.

Most of them were audit managers and seniors — so not really freshmen, but experienced and highly qualified people. Yet after about 5 or 10 minutes of speaking about different types of hedges, one audit manager interrupted me with the question:. I mean the real substance of a difference between fair value hedge and cash flow hedge.

It looks the same in many cases. Can you shed some light there? Although I clearly explain a hedge accounting in details in my IFRS Kitlet me shortly explain what type of hedges we have:.

Fair value hedge is a hedge of the exposure to changes in fair value of a recognized asset or liability or unrecognized firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss. Cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all or a component of a recognized asset or liability or a highly probable forecast transaction, and could affect profit or loss.

But maybe it opens up your mind to logical thinking about hedges. A fixed item means that the item has a fixed value in your accounts and it may provide or require fixed amount of cash in the future. The same applies for unrecognized firm commitments that have not been sitting in your accounts yet, but they will be in the future. Well, here, you are worried, that in the future, you would be paying or receiving a different amount than the market or fair value will be.

This is a fair value hedge — you tied the fair value of your interest payments to market rates.

A variable item means that the expected future cash flows from this item change as a result of certain risk exposure, for example, variable interest rates or foreign currencies. Here, you are worried that you will get or pay a different amount of money in certain currency in the future that you would get now.

It means that in the future, you will pay interest in line with the market, because LIBOR reflects the market conditions.

You want to know how much you will pay in the future, as you need to make some budget, etc. Now you can see that the same derivative — interest rate swap — can be a hedging instrument in a cash flow hedge as well as in a fair value hedge. The key to differentiate is WHAT RISK you hedge.

Always ask yourself, why you undertake the hedging instrument. For example, even when you have a fixed item, you can still hedge it under cash flow hedge and protect it against foreign currency risk. Therefore, please refer to the following table summarizing the types of hedges according to risks and items hedged:.

Please leave me a comment and let me know whether you have dealt with some hedge accounting in practice, what issues you faced and how you solved them. Learn top 7 IFRS mistakes that companies make in their reporting and how to avoid them easily!

Hedge accounting is OPTIONAL, not obligatory. Mainly when the forwards expire within some short term. Hi, Oomesh, yes, basically it is. Just wanted to ask what is the specific difference in hedge accounting between Cash flow hedge and Fair value Hedge. Mayur, please revise the 2 tables above where you can see the tables with journal entries for both hedges. Hi silvia m c. Hi Anjum, yes, I have an easy-to-understand material about hedging, however, it is included in the IFRS Kit http: Hi Silvia, in this case with short term forward agreements classified as CF hedge what will be the accounting entries?

I will go for a forward agreement for 21 days to buy a fixed amount of USD functional currency is RSD in order to pay for the acquisition of a PPE I know the exact amount of this order. How can I record the loss calculated for this agreement as being the difference between spot rate and the actual exchange rate at the settlement date? Thank you very much Silvia. When are you going to take us through Hedge of net investment in a foreign operation in this manner?

The thing is that not many people are interested in this topic, because that type of hedge is taken mostly by bigger companies or corporations and some IFRS expert solves it for them S.

Hi Silvia, Kindly explain the meaning of effective and ineffective portion as I m unable to understand it. Rajesh, Effectiveness is the measure that how successfully hedging instrument has covered the fluctuation in hedged item.

Have a following doubt. If company has issued foreign currency fixed interest rate bond than and to hedge currency risk and interest rate risk it has undertaken cross currency interest rate swap than can this hedge be qualified for both fair value hedge for interest rate movements and cash flow hedge for cross currency movements. If yes than this hedge will be subject to cashflow hedge accounting treatment for currency movements and fair value hedge accounting treatment for interest rate movements.

Hello, Mayur, this is a great and interesting question. The answer depends on the construction of the hedging relationship, but to make it short: If your CCIRS cross-currency interest rate swap is constructed in a way that currency risk element is separable from interest rate risk element, and if these two elements can be separated and measured separately also for your fixed interest rate bond, then you can do it. You just need to designate it in your hedging strategy that way.

I have seen that CCIRS can be used in various types of hedges, for example, pure cash flow hedge if swap is fixed for fixed, just in a different currencyalso pure FV hedge fixed for floating. By the way, if you want to keep your life easier, you can designate your hedge as CF or FV only, depending on the type and conditions of CCIRS.

Have a nice day!

Bank A Subsidiary in started to use Interest Rate Swaps- The Bank A pays fix and receives variable interest rates from Bank B Parent. Expenses in IRS SWAP and Income from SWAP In Bank A recognized Negative fair value financial derivative instruments through profit or loss.

Please can you help in question below: Hi Visar, OK, let me go straight to your questions: Is it officially designated and treated as a cash flow hedge? I have covered it in my IFRS Kit where I show how to calculate the fair value of plain vanilla interest rate swap same currency, fixed for floating.

How should Bank A classify type of hedge in this scenario? Bank A Subsidiary use Interest Rate Swaps- The Bank A pays fix and receives variable interest rates from Bank B Parent. That would be a cash flow hedge for the bank A. Wrt your reply to Visar, wont it be a FV hedge if Bank A is paying fixed as per your initial examples as the Swap is the hedging instrument in this case.

If bank A is paying fixed that means it has a variable rate liability which it is hedging. So as per the example given under CF hedge above this should qualify under CF hedge for Bank A.

Can you tell me how many types of risks are there for which hedging can be done. As per me there are four risks— market price risk, interest rate risk, credit risk and foreign currency risk.

In my view hedging for FX Risk, Interest Rate Risk and Credit Risk limited can be done by hedging. Other components of Market Risk due to macroeconomic scenarios can be managed by diversification. I understand that when a company goes for fair value hedge accounting, they take the accounting priviledge on the hedged item unlike a cash flow hedge where the same is taken on the hedging instrument.

Can a fair value hedge be applied to Available for Sale securities? When I am entering into a FV hedge for a fixed rate debt as mentioned in your exampleI understand we do a fair valuation of the interest component for the debt since FV of debt might also include other variable factors like credit risk, liquidity risk etc.

In such case do I split the FV component and show them separately from the host debt contract? Remember that ACCA examiners give marks for stating the obvious, so do it S. I am doing a college assignment. Can you please tell me what type of hedging reserve this is? Well, when you account for cash flow hedges, then you calculate effective and ineffective portion of FV change in your hedging instrument. Thanks a lot Silvia it really helped.

For a fair value hedge using an interest rate swap to hedge corporate bonds, do the notional values of the swap and the bond s have to be the same? Do the terms of the swap and the corporate bonds have to be the same? Hi Silvia Lucid explanations to explain the hedge treatment. However am not sure what type of hedge would i classify a currency forward to hedge a payment for acquiring a fixed asset in future the currency in which the payment is made is different from the functional currency.

The purchase of fixed asset is committed hence I could call this unrecognized firm committment hedged item and the risk hedged is the foreign currency. Looking at your table where you have summarized the types of hedges it looks like we could use both Cashflow hedges or Fair value hedges which seems to be a bit confusing. Can you please clarify this.

Hi Harry, it depends on what you hedge.

And there are lots of combinations, too. Hi Silvia Thanks for the clarifications. Yes the purchase price payable is fixed in foreign currency. Since the amount payable is fixed in foreign currency, since we are dealing with fixed item i pretty much concluded that we are dealing with the fair value hedge. Shouldnt this be the case? Are we talking about exceptions here? Please let me know. Dear Harry, the thing with unrecognized firm commitments is that IAS 39 permits to hedge foreign currency risk under both fair value and cash flow hedge.

But as I wrote, IAS 39 allows you to account for hedge of unrecognized firm commitment under both types of hedges. Silvia, With reasons can you explain whether hedging reserve is a distributable reserve or non distributable reserve?

Thanks for the clarifications. I understand this much better now. I assume in such cases that there are no advantages in using a particular type of hedge accounting. If you think there is there an advantage in using a particular type of hedge accounting, can you explain with the reasons. We are an European country EUR and we have a contract in Middle East AED for the next 5 years long termso our risk is a foreign currency risk, thus, Should we do a cash flow hedge better than fair valur hedge?

You recommend to work with CF hedge btter than FV hedge… Thank you. You simply need to compare the change in FV of your hedged item and the change in FV of your hedging instrument in CF hedges. Now, the effective part of change in FV of hedging instrument is then 90, and ineffective part is 10 Is it clear, guys?

Thanks a lot Silvia, really appreciate it. I guess its more clear now. But what if it was the other way round? Then what will we do? Thanks again for your help. Very helpful article and thanks for explaining such a complex area in a very simple manner.

It would be great if you can clear my dobut. I had asked this before and guess it was missed. Hi Silvia, thanks for being helpful and so clear! In the case of a variable rate bond, why would a fair value hedge be needed? Since by its very nature, a variable rate bond would be at fair value. We use FOB Shipping point terms. To hedge against the volatility of Forex we entered into a Forward contract to ensure that we already have a fixed amount of local currency equivalent to pay for the obligation.

How should be clasifty this transaction? What are our proposed entries to record this transaction? Should we recognize the RM at the forward rate amount or the FOB date forex. Your explanation is great. To reduce the risk that the bank is exposed to, the bank begins to economically hedge the risk via derivatives. Based on this information — would this be a fair value hedge relationship? What about commodity price hedge this i suppose also can be either cash flow or fair value hedge.

In this case the FV of the hedged instrument will be the unrealised gain or loss as per the broker statement but what about the gain or loss of the hedged item? Will this be the same? Eg customer wants to buy aluminium for USD 2K on 7th Jan and so supplier hedged the same quantity of aluminium at USD 2K on same date on 7th Jan. Broker statement will be USD 10 loss, so will this also represent the gain or loss on the hedged item and hence no entry will be passed?

Dear Rima, it really depends on the type of the hedge. Awesome explanation — thanks so much. Wonder if the predictability of the expected future cash flow is a required for the hedge accounting at inception. Say I am buying Foreign inventory payable in their currency and then If I as a practice keep taking different maturities of hedges to settle that due.

My question is only after i purchase that inventory should I take that hedge can I use the hedge accounting or is it just the predictability of the forecasted purchase to offset my currency exposure variable here. I am assuming that this is cash flow hedge.

Hi Aparna, thank you! You can hedge highly probable forecast transactions — this would be your case. And yes, that would be a cash flow hedge. In relation to an investment in a foreign currency, does the hedge term have to meet the expected life of the investment. If so, what would occur if you cannot get a hedge to match the expected life of the asset, or if there was no defined term for the life of the asset, eg if you were buying property.

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Hi Tony, not necessarily. If you can demonstrate that the hedge will still be effective and meets its objective, then OK. Hi Silva, Nice reading about Hedge Accounting, please help me to have better understanding, i want to ask you that: For a perfectly match condition of Hedge Items versus Hedge Instruments, can we only applied for critical match method for hedge accounting?

Hi Silvia, Needed a clarification: Through this the Co intends to naturally offset USD payment against its forecast receivables in USD. Can this CCIRS be put into a cash flow hedge against highly probable forecast exports? The following issues may arise: Your guidance on the same would be appreciated. YES, the IFRS Kit does include the newest version of IFRS 9. Hi Silvia, thanks for such great explanation.

I have been reading IAS 39, IFRS 7 and 9 and I still did not had an clear understanding between Fair Value and Cash Flow Hedge. I knew that I have to identify the risk, the hedge item, hedge instrument, strategy, economic relationship, effective and inefective portion and many other issues. My industry is Coffee, a well known Commodity. So I will make up the context to you. Arabica Coffee inventory bought at a fixed price.

Arabica Coffee Futures Contracts traded in Intercontinental Exchange ICE, NY. So the economic principle is very clear for me. Short Hedging for selling commodities.

We do not have risk on the buying side of coffee in cash market since, we buy on spot price always. We never buy on a forward or time in advance later. In the same day we make a purchase contract of coffee 1 lot bags of 46 kgwe fix a buying price, and that is the entry price for us to enter the futures market and start the Short hedge by selling 1 lot bags of 46kg futures Arabica coffee contracts in the futures market.

Giving us a short position on the futures market, and long position on the cash market. Now, on the sell side, we do make forward contracts to deliver an exact amount of coffee e. But we do not fix a price, so we call these forward contracts Price to be fix PTBF. Now, that I have explain you the context, I will get you to the big deal I have. Our company is implementing IFRS Idiom for playing the stock market meaning for the first time on FY Our Auditors are Deloitte.

On the previous year we have been using Local GAAP. Which does not even know or recognize financial instruments accounting treatment other than ordinary Assets and Liabilities. We have these Derivaties Financial Instruments and we use them as hedging instruments, both item and instrument are well defined as I have mentioned before.

You mentioned that inventories are Fix item. That is ok for inventories of items that are not listed on Exchanges. For example, cars, iPads, beds, shoes, etc. But for coffee, we have an active market Level 1.

The information of these prices are available best autopilot money making software everyone and they are a common ordinary item. We can say we have a fix item on the buy side, but as I mentioned before we do not make commitments to buy on forward prices just spot prices. And we sell on PTBF that means our value of our sales are unknown, and so are the cash flows related to the income of our physical inventory of coffee.

My boss financial controller says that the inventories are euro sterling rate march 2016 asset an therefore should be treated as a fair value hedge.

The auditos initially wanted to treat the inventory with IAS 2, and Net realizable Value NRV. I do not agree. I have change auditors mind that commodity inventories should not be treated as NRV since the IAS 2 clear states it should be treated as Fair Value. That is ok if the inventories were not hedge. And since we do not like risk, and we want what time does australian forex market open offset market price risk, we use coffee futures to mitigate that risk.

If we had firm commitments or contracts that represent the sale of our inventory we could treat them as Fair value less cost to sell. But since we do not have a fix price, and we are hedging them, I think, understand and belief they should be treated as a Cash Flow Hedge.

To add more context, we do have the practice of making the mark-to-market valuation approach, which in other words represent fair value of inventories.

On the financial instrument derivative [by the way I read commodity contracts are not financial instruments how is that possible or when is it????

If prices get free fv 2 cash down I will have an unrealized gain, and if prices go higher I will have an unrealized loss, ok? Because the futures market position is Short Hedge. MY approach is the following. Any variation of the hedge item and hedge instrument should be taken to: Price Hedge item Dr. Higher Gain Asset Gain inventorie Cash flow Reserve Gain Lower Loss Cash Flow Reserve Loss Liabilitie Loss Hedge instrument Higher Loss OCI Loss Liabilitie Loss Lower Gain Asset Derivatie gain OCI Gain.

We then arrive to the time to make the sell, and we have a known sell price. Cash market offset gain or loss on Cash Flow reserve Equity Future market reclassify gain or loss to income statement when the price is know, and we buy the futures contract we had initially sold.

That exit price will be my new fix price for the sale and the PTBF expires so I do not need any hedge since the market price risk have disappeared. The main reason for these treatment I recall again, is the condition that I have a variable item hedge and not a fix variable hedge coffee inventory. Dear Jacinto, thank you for your comment, and really let me thank you for your trust you placed in me and for posting me this question. However, to answer this question properly, I would need to dedicate more time than I currently can afford.

I believe quick response would not give you the quality and diligence that everybody also you expect from my work. Hence I leave it to other readers to go through your questions and tell you their opinion. When I have more time, I may eventually come back to it. Hi Silvia, thanks for you explanation, very useful. Assuming a perfect hedge lets say either in the form of a cash flow hedge or fair value hedge. A fair value hedge will have zero FX impact because underlying is at same spot rate as hedge and they both mature at same rate.

Is that a fair synopsis? This is exceptional, right. Can you please explain how are we hedging this? I have one question. Is effectiveness or ineffectiveness only calculated in relation to cash what is the best intraday trading indicator hedging relationships or is it also applicable to fair value hedging relationship?

Thank you for your time. Every hedge must meet hedge effectiveness criteria in IFRS 9 in order to apply hedge accounting. If these are met, then you can apply hedge accounting, if not — then no hedge accounting.

However, hedge can me effective, but data entry jobs from home belgaum perfectly effective. For fair value hedges, you only need to determine whether your hedge is effective or not, but once your hedge meets effectiveness criteria, you do not measure effective and ineffective portion separately.

Also, I talk about these issues fully in my IFRS Kit. Iam still very confused when you still talk of IAS 39 yet my tutor told me that it was replaced data entry jobs from home belgaum time ago by IFRS 9.

Today, there are 2 valid standards: IAS 39 and IFRS 9 and the companies can make a choice which one to apply. IAS 39 stops being valid after 1 January only, so fromthere will be only IFRS 9. I also came across this ifrs box nd wow! Just a quick 1 though, hedge accounting for a basic FV hedge is exactly the same as normal accounting treatment of the hedging instrument and item. Hi Glen, thank you! But for the hedged item no. For example, if you hedge your inventories at FV, then you also recognise a change in FV of your hedge item inventorieswhile what is a tick in stock trading, you keep your inventories at lower of cost or NRV IAS 2.

What if the hedged item is already recognised receivable which is denominated in Dollar, where functional currency is Euro FX forward is enterred. Am I legal scams to make money thinking like that?

I wanted to inquire whether I can hedge my Loan payable in USD with my Revenue which I will receive in USD? We revalue these items at fair value every period in the STRGL performing retrospective testing each period and posting the changes accordingly in STGL.

Commodities stock exchange india presume this is correct methodology using IAS39? How will the accounting change following IFR9 implementation? I presume no retrospective testing will be required and the change in fair value will need to be recognised in OCI?

Hi Silvia, thanks for replying to questions like this. I wanted to know if the following is correct. A company has FX denominated loans and entered into forward contracts canadian dollar to indian rupee exchange rate forecast cover the interest and principal payments.

The mark-to-market on the hedge contract sits on the balance sheet. Then follow by the prompt date as dated by the future contract. Is this the right way to account for hedging?? Also can we get cash flow hedge for interest rate swap if the debt agreement was entered into on July 29, where as the interest date swap agreement was entered into on November 20, Does few months variance in the commencement matters?

In banking, we offer fixed rate loans to borrowers and offset the interest rate risk by entering into an interest rate swap or fair value hedge. With the hedge, we pay a fixed rate payment and get a variable rate payment in return.

With regards to reporting the change in fair value of the hedging instrument the loan in this casedoes this amount get added to the book balance of the loan or is it reported separately on the Balance Sheet as part of Other Assets.

I understand the change in fair value demo currency trading in india the hedge is reported as its own item on the Balance Sheet, just not sure if the fair value of the hedging instrument receives the same treatment.

Hi Silvia how to Calculate the effective and ineffective portions of the gain or loss on the hedging instrument? I would like to humbly ask you for your kind help since I have read most of articles here and didnt find the answer. If inventory is hedged through FV hedge and the FV increases during the perioid till reporting date, is the value of inventory changed increased accordingly? Does it not apply here?

I will be forever grateful for your etrade australia online trading, this question is kind of preventing me from further understanding of whole hedge accounting. Thank you1 Have a great day!

Hi Silvia, How to identify the ineffective portion of a hedging instrument practically. Can you stock market rcf a short example to clarify the same under IFRS 9. Up till now, I have found 3 different ways in different books: Is it different for each hedging relationship?

Hi Wen, it strongly depends on what your hedged item is Then the change of fair value goes to the same line as the main expenses related to the hedged item. Hi Silvia, Thanks a lot for the explanation.

In our company we have hedged the foreign currency risk with forward contracts. Is this falling under fair value hedge? Can u please explain on this? But sometimes, it can be a fair value hedge, too. We have a long term loan in USD and intend to re pay with the foreign exchange earning in the future. Could please let me know, which one is the hedge item, hedge instrument and the impact on the OCI when the settlement is made.

I think the difference is the certainty of cash flows. In cash flow hedge u r certain to receive or pay and u just protect from variation in that receipt or payment. In fair value hedge, there is no certainty in cash flow yet as the decision to hold or to sell and when to sell are still undecided.

Is my logic right? How do you present cash hedging in the cash flow statements investment or financing? Is there a specific lingo I should use to add a line in the cash flow? Hi Naomi, I replied somewhere above in the comment. Assume a scenario where I agree a fixed price for a defined quantity of crude oil, say USD90 for 10,bbl of crude. The price of crude in the market is USD30 and I agreed to pay the Buyer USD3. How do I treat this type of hedge? In my view this is as good as a cash and carry transaction.

Do I need to recognize any gain from this type of forward contract since I have basically agreed to sell the crude at a fixed price?

Because as explained earlier, in cash flow hedge we do not touch Hedged Item in accounting?? I enter into dog adoptions near woodstock ga forward to hedge an expenses in future in one year and the invoices will be come in at that point of time.

I recorded it as cash flow hedge. I wonder i well i would have understood that area of Financial Instruments without your presentation Silvia. It was succinct and simply simplified. Thanks and keep it up. I wish everyone would read my stuff so carefully S. Does this justifies to be a Cash flow hedge? Another question is that, since i have entered into a forward contract signed and sealed.

Do I have to record it down as a transaction E. Dear Philip, since this is a derivative, it should be recognized in the financial statements at fair value although initially, the fair value usually comes close to zero. I want to ask from you about Cash Flow Hedge reclassification to earnings. Initially, we recognize gain from hedging in other comprehensive income.

When we can make the reclassification. Hi Silvia, thanks for the explanations. I just get confused on how to account for interest rate swaps with regards to hedging. Bank A is exposed to variable rate payments on their loan liabilities. They enter into a IRS with Bank B to pay fixed and receive variable. So how does hedge accounting change this? Dear Kalpesh, 1 Yes 2 There are 2 things to take care about: Sure, what you pay, is a part of the effective interest method and goes in profit or loss.

I would say this is what happened in the past. You shall recognize the derivative too. This is what will happen in the future its fair value is calculated as present value of future cash flows.

Initially, its fair value is close to zero, but in the subsequent reporting periods, it will have some fair value and you need to account also for fair value change. Here the hedge accounting comes. If you do apply a hedge accounting, then only ineffective portion of change in FV goes to profit or loss and the effective portion is recognized in OCI.

Shipra, I am a little lost in your question. On top of that, if you enterred into a derivative whether for hedge or notthen you should determine its fair value at the end of reporting period northern california livestock market recognize it. In most if not all of the examples you gave above, they would be deemed to be monetary items. A company that held such items in a foreign subsidiary may consider cashflow or fair value hedges depending on the item.

You use historical rate for non-monetary assets only when you translate individual transactions to your functional currency careful about what you translate: And then, about hedging of non-monetary items — maybe it would be great if you specify further what you have in mind.

You can apply cash flow hedge accounting, but only in the consolidated financial statements. Thanks for the explanation. If we purchase your material will it have examples on effectiveness testing brazil companies on nyse cash flow hedges as per AASB I have some questions regarding the designation and treatment of cash flow hedge for FX swap funding swap under IAS FX swap forex data feed providers a swap transaction exchange of principals of different currencies at the beginning and at maturity i.

Initially, I would raise USD by issuing discounted bill and the USD received would be swapped to AUD to fund an asset. At the maturity, the AUD asset would be converted back to USD by swap for repayment of liabilities. Between the value date of near leg and maturity date, I would have a USD Liability and a AUD asset in my balance sheet while the far leg of swap would be a derivative asset or liabilities like a forward fx contract.

Because the Asset and Liabilities would be revalued using spot FX rate and the far leg of FX swap would be remeasured based on forward FX rate, the non-parallel shifts of spot rate and swap rate would cause fluctuation of FX Profit. Therefore, I would like to use cash flow hedging to offset such fluctuation.

Namely, designate the discounted bill in USD as hedged item and the far leg of swap as hedging instrument and hedge on forward rate method My Questions For cash flow designation: Given the liability is a discounted bill, should the value of hedged item equal to the notional value to be paid at the end or the discounted value I received at beginning?

By using forward method Cash Flow Hedge, the value of vanguard total us stock market index leg would be all transferred into OCI. Please note we dont enter into an any forward contract or future contract. We treat this as Cash Flow hedge. This example we are actually doing this not covered in any book. Hi Please I need clarification. I am having difficult establishing if a transaction I am working on is an hedging relationship.

I am currently reviewing the financials of a company which has an account designated as cashflow hedge reserve. Now the entity buys raw material from foreign supplier and agrees times of payment which could be in 3 months. So my client sets aside some foreign currency amount in the bank Eg EURO 15Million for the payment which will be due in say 3 months at an exchange rate of for example NGN per Euro on that day.

So on the payment date the Euro I5 million is translated at the exchange rate of say NGN per Euro and the exchange difference will now be recognized as cashflow hedge reserve.

My concern is that I am unable to identify a third party in this transaction. No one really bears the loss or reward of the transactions. Seems to me like is mere translation of foreign denominated monetary assets using the spot rate on the balance sheet date as required by IFRS. Should we classify a foreign currency denominated fixed rate bond as a fair value hedge or cash flow hedge?

Would like to check with you. If the Company is entered into Cross Currency Swap applying hedge accounting, cash flow hedge and the hedge is effective. The loan which entered into the swap is different from the functional currency. Understand that the Fair Value of the derivative is taken up in Other Comprehensive Income, how about the spot rate translation of the loan itself? I had a question which is more specific to commodity hedges — is the accounting at all affected if there is an asset lien?

I am looking at a gas hedge for a power plant. Also, does the US GAAP differ on this topic? Hi Silvia, how does one think about hedging inventory that comprises gold jewellery, for example. Would this be a fixed hedge…and consequently, one has to adopt the Fair Value method? We do cash flow forecast of our foreign currency purchases. Functional currency is USD. Hi KHF, thank you! There are some differences, but probably not major.

If I take out a forward exchange contract to secure my exchange rate on a forecast transaction for the purchase of inventoryI can obviously apply cash flow hedging. However, once I receipt this inventory, I stop applying cash flow hedging.

Does the hedge then become a fair value hedge or do I simply now account for this as a derivative instrument.

I know the accounting treatment of a derivative and fair value hedge is the same, but want to understand the principle. Dear Jonathan, I think that by the forward contract, you are hedging the planned cash flows and the receipt of inventories is not an event that would force you to discontinue the hedge accounting.

Instead, you keep your hedge accounting until you pay for the inventories and exercise the forward contract. In fact, you are not hedging the inventories themselves, but the payment for these inventories. Also, let me stress that fair value hedge accounting and the accounting treatment of a derivative are NOT the same.

Yes, in both cases, you recognize the fair value change of a derivative in profit or loss, but in the case of fair value hedge, you also recognize the fair value change of the hedged item in profit or loss. Dear Muhammad, hmmm, this is really a complex question and I think I need to write some article about it. Firstly I thank you for replying my question.

I made a flow chart presentation according to your comment still found very complicated.

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I would really appreciate if you write an article on this complex matter with numerical example for better understanding.

Hi, Can you please also explain how to account for cross currency interest rate swaps CCRIS. I understand that fixed to fixed CCRIS are fixed interest payments in future and can be treated similar to forward contracts.

But how to account for floating to fixed CCIRS and vice versa and floating to floating CCRIS. DO we apply hedge accounting these? What is your hedged item? What precisely is your hedging instrument — is it the full CCIRS? Or a part of it? Also, can you measure hedge effectiveness somehow? If you hold your CCIRS outside any hedging relationship, then no, you do not apply hedge accounting, but you should account for all fair value changes of that derivative in profit or loss.

Dear Priya, it depends on what risk you hedge. You need to specify that precisely. Are you protecting against foreign currency movements? Are you protecting against fair value movement i. Great article, thanks very much! I think I now am clear about fair value vs cash flow hedges. But now I see people speaking about balance sheet hedging vs cash flow hedging, and then things get muddled again.

Can you tell me how to account for hedging for a portion of assets classified at Amortised cost. As far as I know, the answer is yes, as I am trying to hedge the FX exposure. I was wondering if this is a possible scenario. Appreciated for this great article which helps me a lot to understand for about the topic. And it answers your question.

I have a question. Daniel, you should hedge only 90 of sales, not units. The hedging instrument to hedge additional 10 units that do not exist should not be accounted for as a hedge accounting, but as a regular derivative. In the example of accounting for fair value hedge given above, no hedge effectiveness testing has been included. Is it not compulsory to test hedge effectiveness for fair value hedges?

If so, what could be the logic of keeping it mandatory for only cash flow hedges and not for fair value hedges? As far as I know, under US GAAP, hedge effectiveness testing is done for both fair value and cash flow hedges. Hi Juhi, you should test the fair value hedge for the effectiveness. Silvia I watch your video a lot and you are very helpful. What are the hedges we can use on securities equities FVH OR CFH OR BOTH…AND what should be our hedging instruments for this.

In case of fair value hedge, why there is no requirement for a reserve like that in cash flow hedge? Request to clarify the logic. But what happens if the swap is based on two floating interest, for example: A bank pays 3M LIBOR and receives 1M LIBOR, which type of hedge it will be?

I am not asking for a currency swap. It is a basis swap, in which we swap the base on which the floating rates depends. Hi Silvia, I have the same query as Neal. Suppose X borrows 3M LIBOR and hedges it by an interest rate swap in which it receives 3M LIBOR and pays 1M LIBOR. So hedged item here is the 3M LIBOR. Is it the cash flow hegde or fair value hedge? OK, nice but I understood that Fine, let me tell you that this basis swap that exchanges one variability for another type of variability does not qualify for neither type of the hedge.

But, if you combine this swap with another derivative, well then, it could be possible to designate this combined item in either fair value hedge or cash flow hedge, depending on the specific circumstances. I have been studying theory but still I am not clear with the distinction of the two hedges. I got lost on the cash Flow hedge. What do you mean by effective portion and ineffective portion, Please help. The way I see it that company has converted something variable into fixed, so it is cash flow hedge.

And if it is fair value hedge, what am I doing wrong? I see only 1 contract — that is to sell the inventory in 3 months at fixed price. Hi Silvia, Entity entered into the contract to guard against the future fluctuations in the price of cotton so that the value of its inventory does not fallso inventory is hedged item.

And lets assume contract can be net-settled. And thanks a lot. Hedge of inventory in hand through a forward contract is accounted for as cash flow hedge of fair value hedge? Thanks for your time. If fair value hedge accounting requires adjustment of hedge itemparticularly when fair value of hedge item increasesdoes this mean IAS 2 has no application when company uses fair value hedge accounting? Hope to hear back soon as its very urgent!

Thanks for the great article. Yes, it is a cashflow hedge. Does this sound correct? During NAIRA has been drastically devaluated and the equivalent amount of naira that we are getting from client against the advance is giving us a huge loss on the current year. Would you be able to provide some insight and sample affecting this matter. Home Articles About IFRS IFRS videos Financial Statements Consolidation and Groups Revenue recognition Financial Instruments Income Tax Foreign currency Leases PPE IAS 16 and related Impairment of assets Intangible assets Inventories Provisions and Contingencies Accounting estimates IAS 8 Employees US GAAP Not just IFRS IFRS Courses IFRS Kit FAQ Contact About Us FREE UPDATES My Account.

Difference Between Fair Value Hedge and Cash Flow Hedge. Financial InstrumentsIFRS Accounting. Yet after about 5 or 10 minutes of speaking about different types of hedges, one audit manager interrupted me with the question: What types of hedges do we have? Although I clearly explain a hedge accounting in details in my IFRS Kitlet me shortly explain what type of hedges we have: What is a Fair Value Hedge?

Have you already checked out the IFRS Kit? Click here to check it out! Financial Instruments IAS 39 IFRS 9. You will also receive a valuable IFRS mini-course. Fill out the form below to get your Free Report: Hi Madam, Just wanted to ask what is the specific difference in hedge accounting between Cash flow hedge and Fair value Hedge. Difficult subject matter well explained. Hello Madam, Have a following doubt. Thanks in advance and kind regards, Janni.

Thank you very much Silvia, Bank A Subsidiary in started to use Interest Rate Swaps- The Bank A pays fix and receives variable interest rates from Bank B Parent. Thank you very much Silvia, Just to clarify, How should Bank A classify type of hedge in this scenario?

Cash flow hedge or Fair value hedge I sincerely appreciate the time you spent in my issue Best regards, Visar. Hi Silvia Wrt your reply to Visar, wont it be a FV hedge if Bank A is paying fixed as per your initial examples as the Swap is the hedging instrument in this case.

Hi Sambhav In my view hedging for FX Risk, Interest Rate Risk and Credit Risk limited can be done by hedging. Hi Silvia, Very helpful article and thanks for explaining such a complex area in a very simple manner.

I have couple of questions; 1. Many thanks in advance Regards, Manish. Thank you in advance. Thanks silvia, the topic is explained in a perfect manner. Was very helpful and interesting. Silvia, For a fair value hedge using an interest rate swap to hedge corporate bonds, do the notional values of the swap and the bond s have to be the same? Please let me know Thank you Warm Regards Harry. Dear Silvia Thanks for the clarifications.

How to determine the effective and ineffective portion of cash flow hedge. Hi Silvia, Good day! Thanks in advance and hope you can help us.

I have a question regarding the hedge relationships, from a banks perspective, lets say a bank provides a interest rate gurantee on a mortgage for a period of 6 months. I am assuming that this is cash flow hedge Thank you — I stumbled upon your resource — its brilliant. I would like to thanks in advance for your favourable reply. Thanks So Much Silvia. Please i need a response as urgent as possible.

Who makes more sense, me or my boss? What is effective and ineffective portion, Please give a suitable example. Hi Sylvia I also came across this ifrs box nd wow! Only difference comes with CF hedges. Am I right in this! Dear Silvia, Thank you for a very very useful web site. I would like to kindly ask a question. Thank you so much Silvia for your very helpful and quick response.

Hello Silvia, I wanted to inquire whether I can hedge my Loan payable in USD with my Revenue which I will receive in USD? Is that possible under IAS 39 and IFRS 9? Many thanks for clarifying.

The sales and purchases is only recognised when the goods is delivered and onto the FP and PL. This should be designated as fair value hedge?

Dear Silvia Wonder how you explain such complicated topics at ease. I have been searching internet for 2 months in a row and still didnt find answer for this: Hi Silvia, Need a clarification. Have to say, very helpful! Hi Silvia, Assume a scenario where I agree a fixed price for a defined quantity of crude oil, say USD90 for 10,bbl of crude.

Hi Silvia, I enter into a forward to hedge an expenses in future in one year and the invoices will be come in at that point of time.

Hi Silvia Another question is that, since i have entered into a forward contract signed and sealed. Sivia I want to ask from you about Cash Flow Hedge reclassification to earnings. Hi Sylvia I have an interest in the impact of FX movement for reporting purposes. Hi Sylvia I have some questions regarding the designation and treatment of cash flow hedge for FX swap funding swap under IAS My case, I am currently reviewing the financials of a company which has an account designated as cashflow hedge reserve.

Please assist to provide me with guidance on this as I am so confused. Hi Sylvia, Should we classify a foreign currency denominated fixed rate bond as a fair value hedge or cash flow hedge? Ah got it both! Dear Silvia, Would like to check with you. Hi Silvia, thanks for all the detailed explanations! Hi Silvia, Excellent Post! Thank you for making it so simple. I have two questions: Is there a major difference between GAAP and IFRS on hedge accounting? Hi Silvia, If I take out a forward exchange contract to secure my exchange rate on a forecast transaction for the purchase of inventoryI can obviously apply cash flow hedging.

Dear Silvia, Firstly I thank you for replying my question. Muhammad, may your wish come true. Hi silvia The article is very helpful. Thanks for explaining complex topic in a simple way. Hi Sylvia, Great article, thanks very much! Hello Sylvia, Can you tell me how to account for hedging for a portion of assets classified at Amortised cost. It depends on what you are hedging. Is it the fair value hedge or a cash flow hedge? Hi Silvia, Appreciated for this great article which helps me a lot to understand for about the topic.

Hi Silvia, I have a question. Why this is happening if purpose of both is hedging? Thanks and regards, Daniel. Madam Silvia In the example of accounting for fair value hedge given above, no hedge effectiveness testing has been included. Thank you in advance for the clarification. Madam In case of fair value hedge, why there is no requirement for a reserve like that in cash flow hedge? Hi Madam, Thanks for explaining such a difficult topic so clearly. Currency swaps can be both cash flow hedge and fair value hedge.

Hi, I am not asking for a currency swap. Hi Silvia, Suppose X borrows 3M LIBOR and hedges it by an interest rate swap in which it receives 3M LIBOR and pays 1M LIBOR. He Madam, I have been studying theory but still I am not clear with the distinction of the two hedges. Hi Silvia Thanks for your time and effort in all this. Hi Silvia, waiting for your guidance. Hi silvia, so my question is: Post a Reply Name: How to Account for Debt Factoring or Selling of Receivables When I was auditing the financial statements of How to Make Consolidated Statement of Cash Flows with Foreign Currencies Did you know that many groups prepare their cons How to Make Hedging Documentation If your company enters into some derivatives or Troubles with IFRS 16 Leases The new lease standard IFRS 16 can initially cau This website uses cookies to improve your experience.

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