Ind AS 107 Hedge Accounting Disclosures

Understand Ind AS 107 Hedge Accounting Disclosures

Key rules to remember

Cash flow hedge reserve roll-forward

Closing reserve = Opening reserve + Effective hedging gain/(loss) recognised in OCI − Amount reclassified to profit or loss − Amount removed and included in the initial cost of a non-financial hedged item

Use the same sign convention throughout (credit as positive). Ineffective portion goes to profit or loss, never to the reserve. Tax effects, if given, are shown separately.

Weighted average hedged rate

Average rate = Σ(Nominal amount × Contract rate) ÷ Σ Nominal amount

Compute separately for each time band and each risk category. Give the nominal amount and the average rate or price side by side.

Hedge ineffectiveness in profit or loss (cash flow hedge)

Cumulative effective amount = Lower, in absolute terms, of (cumulative gain/loss on the hedging instrument since inception) and (cumulative change in present value of the expected future cash flows of the hedged item since inception); OCI for the year = Cumulative effective amount − Amount recognised in OCI in earlier periods; Ineffective portion for the year = Gain/loss on the hedging instrument for the year − OCI for the year

The lower-of test is applied on a cumulative basis from inception, not on the year's movement alone. First find the cumulative effective amount, then deduct what was recognised in OCI in earlier periods to get the current-year OCI. The ineffective portion goes to profit or loss and its line item must be disclosed. If the hedging instrument's cumulative gain is the lower amount, the whole of it is effective and no ineffectiveness arises from this test.

Three-block disclosure structure

Strategy → Amount, timing, uncertainty → Effects on position and performance

Use this as your answer skeleton. Disclose by risk category, with fair value, cash flow and net investment hedges shown separately.

How to solve Ind AS 107 Hedge Accounting Disclosures questions

1. 1Identify the risk category (currency, interest rate, commodity) and the type of hedge (fair value, cash flow, net investment) from the case.
2. 2Check that hedge accounting is applied. The disclosures cover only exposures you hedge and for which you elect hedge accounting.
3. 3State the strategy disclosures: how the risk arises, how it is managed, the extent of exposure hedged, and any risk component designated.
4. 4Give the amount, timing and uncertainty disclosures: terms of the instrument, nominal amount by time band, average price or rate, and expected sources of ineffectiveness.
5. 5Give the effect on financial position: carrying amount of the hedging instrument (assets and liabilities separately), balance sheet line item, nominal amount and the change in fair value used to measure ineffectiveness. Add the hedged item details.
6. 6Give the effect on performance: ineffectiveness in profit or loss, amount reclassified from the reserve with its line item, and hedging gains or losses in OCI.
7. 7Do the arithmetic: weighted average rates, ineffective portion, and the reserve roll-forward. Show each line.
8. 8Conclude in one line that the information is presented by risk category, then tie it to the case facts.

Quickest way: Three-block checklist with a quick roll-forward

Common mistakes in Ind AS 107 Hedge Accounting Disclosures

• Disclosing hedge information for every derivative the company holds.

  Students treat all derivatives as hedges.

  Fix: The hedge accounting disclosures apply only to exposures for which hedge accounting is elected. Other derivatives are covered by the general disclosures on financial instruments.

• Giving one blended disclosure for all risks.

  It is shorter to write.

  Fix: Disclose by risk category, and within each separate fair value, cash flow and net investment hedges.

• Putting hedge ineffectiveness in the cash flow hedge reserve.

  Students remember that hedge gains go to OCI and apply it to the whole change.

  Fix: Only the effective portion goes to OCI. The ineffective portion is recognised in profit or loss, and its line item is disclosed.

• Writing only the nominal amount and forgetting timing and average rate.

  Students read 'amount' and stop there.

  Fix: The objective covers amount, timing and uncertainty. Show nominal amount by time band with the average price or rate.

• Taking a simple average of rates instead of a weighted average.

  It saves a step.

  Fix: Multiply each nominal amount by its rate, add, and divide by total nominal amount.

• Leaving out the reclassification adjustment and its line item in the roll-forward.

  Students stop once they have the OCI gain.

  Fix: Always show the amount moved from the reserve to profit or loss, name the line item (for example revenue), and show the closing balance.

Worked examples