Accounting for a fair value hedge
How do you account for a fair value hedge?
A fair value hedge is accounted for as follows:
- The gain or loss on the hedging instrument is recognised in profit or loss. If the hedging instrument hedges an equity instrument classified as FVOCI, then it is recognised in other comprehensive income.
- The hedging gain or loss on the hedged item is adjusted against the carrying amount of the hedged item and be recognised in profit or loss. If the hedged item is a financial asset measured at FVOCI the hedging gain or loss on the hedged item is recognised in profit or loss. If the hedged item is an equity instrument classified as FVOCI, those amounts should remain in other comprehensive income.
- When a hedged item is an unrecognised firm commitment, the cumulative change in the fair value of the hedged item subsequent to its designation is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss.
- When a hedged item in a fair value hedge is a firm commitment (or a component thereof) to acquire an asset or assume a liability, the initial carrying amount of the asset or the liability that results from the entity meeting the firm commitment is adjusted to include the cumulative change in the fair value of the hedged item that was recognised in the statement of financial position.
- Any adjustment arising from above shall be amortised to profit or loss if the hedged item is a financial instrument (or a component thereof) measured at amortised cost. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for hedging gains and losses.
- The amortisation is based on a recalculated effective interest rate at the date that amortisation begins. In the case of a financial asset (or a component thereof) that is a hedged item and that is measured at fair value through other comprehensive income, amortisation applies in the same manner but to the amount that represents the cumulative gain or loss previously recognised instead of by adjusting the carrying amount.