Accounting for an undesignated fair value hedge
When an entity adopts Ind AS for the first time, how will an undesignated fair value hedge be accounted for?
At the transition date, it is likely that hedging instruments may not be recognised or valued. So, an entity as on the date of transition should measure the derivatives at fair value. It should also eliminate deferred losses and gains, if any, arising on derivatives as if they were assets or liabilities. In respect of fair value hedge, as per the previous GAAP, it is likely that an entity may not have recognised the fair value of both the hedged item as well as the hedging instrument. On first-time adoption, the entity need to first recognise the fair value of derivatives and adjust the carrying amount of the hedged item at the date of transition to Ind AS which is lower of the following, viz,
- that portion of the cumulative change in the fair value of the hedged item that was not recognised as per previous GAAP;
- that portion of the cumulative change in the fair value of the hedging instrument and, as per previous GAAP, was either (i) not recognised or (ii) deferred in the Balance Sheet as an asset or liability.