Route 102 – One man’s year-long journey……Day 40

  • By Jeremy Williams
  • 20 March 2015 00:00

To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many).

Day 40 (20 Mar)

In yesterday's blog post, I discussed hedged items and hedging instruments (within section 12 of FRS 102).

Paras 12.16-16C outline the scope for treating items as hedged items. Such items (provided they can be measured reliably) can be:

  • recognised assets or liabilities
  • an unrecognised 'firm commitment' (a binding agreement to a future exchange of 'resources' such as a commodity at set quantities, prices and dates)
  • a 'highly probable' forecast transaction, even where there is no 'firm commitment', or
  • a net investment in a foreign operation.
  • Hedge accounting is only appropriate when dealing with an external party, and thus wouldn't apply to an intra-group arrangement except in limited cases (such as where one party is a subsidiary which is, for whatever reason, not being included in the group accounts).

    Hedged items can consist of a group of components which met criteria in 12.16B-C (mainly that the risk position is shared by all).

    Paras 12.17-12.17C do the same for hedging instruments, which need to be financial instruments measured at FVTPL (see last week's post) and are a contract with an external party (external to the group or individual entity being reported on). Written options are generally excluded from the definition.

    Finally, 12.18-18A outline the five conditions for using hedge accounting (the first being that the relationship consists only of a suitable hedged item and hedging instrument). The other four are important to bear in mind:

  • The hedge must be consistent with the entity's risk management objectives.
  • There is an 'economic relationship' between the hedged item and hedging instrument (ie they're expected to move in opposite directions in response to the same risk).
  • There is adequate documentation of the hedging relationship by the entity.
  • The entity has determined and documented causes of hedge ineffectiveness (ie the degree to which the economic relationship is not perfect).
  • Phew! Need a break? Why not take a weekend off - I intend to. See you on Monday.

    If you missed the last instalment click here

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