Cash flow hedge mechanics

(paragraphs 29-30 and BC130-BC140) This example illustrates the proposed presentation in the exposure draft for accounting for cash flow hedges. This example has been prepared by the staff of the IASB. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. In this example we have highlighted each item in the proposals with a different colour. We have then used the same colour highlight to indicate how that proposal would be presented in the financial statements. These illustrations are very simplified and serve only to improve the understanding of the proposals.

The proposals in the exposure draft

1.

Paragraph 29(a) proposes that the component of equity associated with the hedged item (cash flow hedge reserve) is adjusted to the lower of the following (in absolute amounts): (a) the cumulative gain or loss on the hedging instrument from inception of the hedge; and (b) the cumulative change in fair value (present value) of the hedged item (ie the present value of the change in the hedged expected future cash flows) from inception of the hedge.

2.

Paragraph 29(b) proposes that the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (ie the change in the cash flow hedge reserve calculated in accordance with 29(a)) shall be recognised in other comprehensive income.

3.

Paragraph 29(c) proposes that any remaining gain or loss (ie hedge ineffectiveness) is recognised in profit or loss.

4.

Paragraph 29(d) proposes (amongst other things) that if a cash flow hedge does not result in the recognition of a non-financial asset or non-financial liability, the amount in the cash flow hedge reserve shall be reclassified from the cash flow

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hedge reserve to profit or loss as a reclassification adjustment in the same period or periods during which the hedged expected future cash flow affects profit or loss.

Statement of financial position

Assets
Hedging instrument

CU

xx

Statement of profit or loss and other comprehensive income

Profit or loss (income statement)
Income or expense (hedged item) Hedge ineffectiveness

CU

xx xx

Other comprehensive income

Gain or loss on the hedging instrument that is determined to be an effective hedge Transfer from cash flow hedge reserve to profit or loss
(this assumes the forecast transaction does not result in the recognition of a asset or liability, but rather an item of income or expense)

xx

xx

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Cash flow hedge mechanics for hedges of groups of items

(paragraphs 37, B82 and BC177) The exposure draft proposes that an entity generally present cash flow hedges for groups of items in the same way it would present a cash flow hedge for an individual item. However, the exposure draft proposes some additional requirements in the context of hedges of groups of items.

The proposals in the exposure draft

Paragraph 37 proposes that for a hedge of a group of items with offsetting hedged risk positions that affect different line items in the income statement (eg in a net position hedge), any hedging instrument gains or losses recognised in profit or loss shall be presented in a separate line from those affected by the hedged items.

Statement of financial position

Assets
Hedging instrument

CU

xx

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Statement of profit or loss and other comprehensive income

Profit or loss (income statement)
Income (part of the group of hedged items) Expense (part of the group of hedged items) Separate line item (hedging gain or loss) Hedge ineffectiveness

CU

xx xx xx xx

Other comprehensive income

Gain or loss on the hedging instrument that is determined to be an effective hedge Transfer from cash flow hedge reserve to profit or loss
(this assumes the forecast transaction does not result in the recognition of a asset or liability, but rather an item of income or expense)

xx

xx

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