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CA Final · Financial Reporting · Hedge Accounting

Mehta Auto Ltd hedges commodity price risk using futures and also hedges interest rate risk using swaps, applying hedge accounting to both. For each hedging relationship, the notes must explain how the entity assesses and sets up the hedge. Which description is among those that Ind AS 107 says the information should include?

Ind AS 107 requires a description of how the entity determines the economic relationship between the hedged item and the hedging instrument when assessing hedge effectiveness. It also covers the hedging instruments used, how the hedge ratio is established and the sources of ineffectiveness; counterparty ratings, tax rates and segment budgets are not specified.

  1. AHow the entity determines the economic relationship between the hedged item and the hedging instrument for assessing hedge effectivenessCorrect
  2. BThe names of the counterparties and their credit ratings for every derivative contract
  3. CThe tax rate used to compute deferred tax on the cash flow hedge reserve
  4. DThe budgeted profit of the business segment in which the hedged item arises

Explanation

Ind AS 107 (para 22B) says the information should include the hedging instruments used and how they are used, how the entity determines the economic relationship between the hedged item and the hedging instrument for assessing effectiveness, and how it establishes the hedge ratio and the sources of ineffectiveness. Counterparty names, tax rates and segment budgets are not listed there.

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