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How are the hedged items designated in IAS 39?
In hedge accounting, items being hedged are to be identified and designated at inception of hedge.
Some of the examples of hedge items are assets, liability, forecasted transaction (highly probable), net investment (foreign operation), firm commitment or group of above items.
Hedged items essentially expose the entity to risk that changes fair value or cash flows (future) and these changes may affect income statements in present or future periods.
Risks mostly hedged are foreign currency risk, equity price risk, credit risk, interest rate risk and commodity price risk.
Internal or own equity instrument is not considered as a hedged item. Exposures to general business, risk of obsolescence of plants, risk of unseasonal weather are some of the risks which can’t be measured.
The risks involved with the hedged instruments are mentioned below−
- Inflation risk − If there is any inflation risk then the cash flow related to linked debt is exposed and changes in future. Hedge accounting may be applied to exposed cash flow.
- One-sided − Risk of change in fair value/cash flow of hedged item because there is a change in price of hedged item above or below a particular price.
International Accounting Standards 39 (IAS 39)
Recognition and measurement of IAS 39 financial instruments was issued by IASC (International Accounting Standards Committee) in 1999, March and later in 2000, November five limited revisions were issued by IASC to IAS 39.
IASC published implementation guidance in March 2000. This publication is made in question & answers form. Subsequently, IASC established an implementation guidance committee (IGC) and published a series of Questions and Answers (Q & A). April 2001, IASB resolved all standards and interpretations issued previously and applicable until they were amended.
According to the Indian accounting standards 39 (IAS 39), hedged items are designated as follows −
- An asset/liability/unrecognised firm commitment/a forecast transaction/net investment in foreign operations are recognised as hedged items.
- Only financial items are possible to hedge risk.
- As hedged items, net positions are not allowed.
- As hedged items, use of layers are restricted (layers are allowed only for cash flow hedges).
- As hedged items, derivatives are not allowed
Some of the examples of are as follows −
- Fixed interest rate or floating interest rate.
- Forecast sales/purchases (forecasted highly probable) in foreign currency.
- Receivables, borrowings, investments and payables (foreign currency).
- Loans & receivables.
- Purchase/sale (forecasted highly probable) of commodity price risk.
- Sale of equity investment.
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