Skip to content

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

Kappa Co designates a firm commitment to sell aircraft parts at a fixed foreign currency price as the hedged item in a fair value hedge of foreign currency risk, using a forward contract. At the reporting date the forward has a loss of $12,000 and the change in fair value of the firm commitment attributable to currency risk is a gain of $11,000. How is this accounted for?

Both movements go through profit or loss: the $12,000 forward loss and the $11,000 gain on the firm commitment, which is recognised as an asset. The net $1,000 charge represents hedge ineffectiveness. A fair value hedge does not use the OCI reserve for these amounts.

  1. ALoss of $12,000 in OCI and gain of $11,000 in OCI
  2. BLoss of $12,000 in profit or loss and gain of $11,000 recognised in profit or loss as an asset for the firm commitment, giving a net charge of $1,000Correct
  3. CLoss of $12,000 in profit or loss only, with no recognition of the commitment
  4. DNet loss of $1,000 in OCI as ineffectiveness

Explanation

In a fair value hedge both the derivative loss and the hedged item gain are recognised in profit or loss. The firm commitment's change in fair value is recognised as an asset or liability. Net P&L effect is the ineffective $1,000 charge. Recognising only the derivative would ignore the hedged item adjustment.

Did you get it right without looking?

One question tells you little. A timed set on Financial instruments shows your real accuracy, how long you take and where you lose marks.

Practise Financial instrumentsFree diagnostic mock

More Financial instruments questions