Hedge Accounting related Articles

Hedge Accounting

Discontinuation of hedge accounting

Discontinuation of hedge accounting Only prospective discontinuation Discontinuation of hedge accounting applies prospectively from the date on which the qualifying criteria are no longer met. An entity shall not de-designate and thereby discontinue a hedging relationship that: still meets the risk management objective on the basis of which it qualified for hedge accounting (ie, the entity still pursues that risk management objective); andcontinues to meet all other qualifying criteria (after taking into account any rebalancing of the hedging relationship, if applicable). The distinction between the entity’s risk management strategy and the risk management objectives is already discussed earlier. To recapitulate, the risk management strategy is …
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Equity derivatives and interest rate derivatives

Equity derivatives and interest rate derivatives Equity derivatives The important difference between futures contract and options contract is that in the case of a futures contract, the risk-reward is symmetric, whereas in an options contract, the risk reward is asymmetric. In other words, if a person enters into a futures contract, he or she stands to gain or lose exactly the same amount if the price of the underlying moves up or down. For example, let us assume that a person enters into a futures contract to buy 100 shares of ABC Limited at Rs 100 with the settlement date after 30 …
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Hedge Accounting as per indas109 / IFRS 9

Hedge Accounting as per indas109 / IFRS 9 It may be useful to understand the genesis of hedge accounting as to how the process itself matured over the last two decades. Even though this may not be relevant in the context of Indian Accounting Standards as we in India have inherited the accounting standards relating to financial instruments in general and hedge accounting in particular based on the accounting standards issue by the International Accounting Standards Board (IASB) as on 24 July, 2014.  The main reason for revamping the accounting standards relating to financial instruments by the IASB is the direct outcome …
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Hedging instruments and hedged items

Hedging instruments and hedged items Hedging  instrument A hedging instrument should normally have one or more of the following characteristic features It should help minimise risk.It should protect the profit still unrealised by locking the same.It should not have the effect of realising the unrealised profit.It should not increase the existing risk by taking a changed exposure or additional exposure to risk.It should usually have a positive net present value, ie, it should be an asset in the books and should not be a liability at any point of time. (There are exceptions to this feature explained later.)It usually has a zero cost …
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Qualifying criteria for hedge accounting

Qualifying criteria for hedge accounting Three criteria for hedge accounting A hedging relationship qualifies for hedge accounting only if all of the following criteria are met: Eligible instruments only The hedging relationship consists only of eligible hedging instruments and eligible hedged items. Formal designation and documentation At the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge. That documentation shall include identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess whether the hedging relationship meets the …
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What is meant by Hedging

What is meant by Hedging Requirements for hedging Hedging is a mechanism to either minimise the loss or to protect unrealised profits, if any. Maximising the profit is not an objective of hedging. Hedging is a risk management tool. There has to be two components – one underlying instrument – known as the ‘hedged item’ and the other usually a derivative instrument – known as the ‘hedging instrument’. The fair value changes of one instrument would more or less offset the fair value changes of the other instrument. For example, if there is a loss in the underlying instrument, there would be …
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