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

Delta Co's finance director asks the accountant to omit from the financial statements an interest rate swap with a year-end fair value liability of $4m, arguing it had zero cost at inception and its settlement is not yet due. The swap is material and no hedge accounting was documented. What is the appropriate response?

The swap must be recognised at fair value, giving a $4m liability and a $4m loss in profit or loss, as no hedge accounting applies. Nil initial cost does not justify omission, and if the director insists the accountant should escalate to those charged with governance.

1. AAgree, as derivatives with nil initial cost are recognised only on settlement
2. BDisclose the swap in the notes only, as a contingent liability
3. CRecognise the swap at fair value through profit or loss, recording a $4m liability and loss, and raise the ethical concern with those charged with governance if the director insistsCorrect
4. DRecognise the loss in OCI because no hedge documentation exists