Rebalancing and discontinuation of cash flow hedge
Briefly explain rebalancing and discontinuation of cash flow hedge.
- If the hedge effectiveness requirements are not met, the entity should adjust the hedge ratio by a process known as ‘rebalancing’ so long as the hedging relationship continues to meet the risk management objective of undertaking the hedge.
- When the hedging instrument is liquidated or if the hedge is discontinued otherwise the balance in the cash flow hedge reserve will continue to remain there till the expected cash flows affecting the hedged item affects the profit and loss account.
If the hedged expected future cash flows are not expected to occur, then to that extent it is immediately recognised in profit and loss account.
- A properly designated hedge cannot be discontinued voluntarily by an entity unless the risk management objective of undertaking the hedge continues to the same.
Rebalancing means adjustments made to the designated quantities of the hedged item or the hedging instrument for the purpose of maintaining a hedge ratio to comply with the hedge effectiveness requirements.