Hedge accounting

Question 1

Why hedge (IFRS 9)

Answer 1

To mitigate business risk.

Where an item in the FS or future cash flow is subject to a potential fluctuation in value that could be detrimental to the business.

Question 2

Must include a hedging provision under IFRS 9 under what criteria

Answer 2

Only where the items are eligible hedging items
It was designated at its conception as a hedge with full documentation of it being a hedge
Meets hedge effectiveness requirements;
Economic relationship in principle works
Effect of credit risk does not dominate the value changes
Ratio of hedging instrument to item works

Question 3

Types of hedging

Answer 3

FV - to protect the FV of an existing item in BS. Gain/loss through P&L

Cashflow - the item is effecting future cash flows (buying/selling assets). Must be highly probable. Gains/losses to OCI (effective), P&L (ineffective)