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ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments

Beta plc has a cash flow hedge of forecast sales with a cumulative gain of $90,000 in the cash flow hedge reserve. Management now says the forecast sales are no longer expected to occur, although the hedge was effective until now. The finance director suggests leaving the gain in equity to keep profit smooth. What does IFRS 9 require?

The $90,000 must be reclassified immediately to profit or loss, because IFRS 9 requires the cash flow hedge reserve to be released when the hedged forecast cash flows are no longer expected to occur. Retaining it in equity to smooth profit would be inappropriate and misleading.

  1. ALeave the $90,000 in the reserve until the hedging derivative matures
  2. BReclassify the $90,000 to profit or loss immediately, because the future cash flows are no longer expected to occurCorrect
  3. CTransfer the $90,000 directly to retained earnings
  4. DAdjust the $90,000 against the carrying amount of the derivative

Explanation

If the hedged future cash flows are no longer expected to occur, the amount accumulated in the cash flow hedge reserve is reclassified immediately to profit or loss as a reclassification adjustment. Leaving it in equity to smooth profit would be an ethical and reporting concern as it misrepresents performance.

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