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CA Final · Financial Reporting · Hedge Accounting

Kaveri Power Ltd has hedged its floating-rate borrowing with an interest rate swap. The CFO is drafting the hedge accounting note and wants to cover the requirement to describe how the entity determines the economic relationship between the hedged item and the hedging instrument. Under Ind AS 107, this description forms part of information about which of the following?

The description of how the economic relationship is determined belongs to the risk management strategy disclosure. Ind AS 107 requires this alongside the hedging instruments used and how the hedge ratio is established and what sources of ineffectiveness exist.

  1. AOnly the entity's tax treatment of the swap
  2. BThe entity's risk management strategy and how it is applied, including how it assesses hedge effectiveness, establishes the hedge ratio and identifies sources of ineffectivenessCorrect
  3. COnly the carrying amount of the hedged item
  4. DOnly the amounts reclassified from the cash flow hedge reserve to profit or loss

Explanation

Ind AS 107 requires information about the risk management strategy to include a description of the hedging instruments used, how the economic relationship is determined for assessing effectiveness, and how the hedge ratio is established with the sources of ineffectiveness. It is therefore strategy information, not tax or reclassification amounts.

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