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CA Final · Financial Reporting · Hedge Accounting

Meridian Steels Ltd hedges iron ore price risk and foreign currency risk, both with hedge accounting. At the start of the hedge it disclosed, by risk category, the sources of ineffectiveness expected to affect the relationship (differences in credit risk of the counterparty). During the year, a mismatch in timing of cash flows emerged as an additional, unexpected source of ineffectiveness in the currency hedge. Which statement correctly reflects Ind AS 107?

The entity must disclose the newly emerged source of ineffectiveness by risk category and explain the resulting hedge ineffectiveness. Ind AS 107 requires this for other sources arising during the hedging relationship, in addition to disclosing the sources expected at inception.

  1. ANo further disclosure is required because only expected sources need to be disclosed
  2. BThe entity must disclose the new source by risk category and explain the resulting hedge ineffectivenessCorrect
  3. CThe entity must disclose the new source only for the iron ore hedge, as it is a commodity risk
  4. DThe entity must discontinue hedge accounting and disclose nothing further

Explanation

Ind AS 107 requires disclosure by risk category of sources of ineffectiveness expected during the term, and, if other sources emerge, disclosure of those sources by risk category with an explanation of the resulting ineffectiveness. Limiting disclosure to expected sources is wrong.

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