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CA Final · Financial Reporting · Hedge Accounting

Narmada Auto Ltd hedges commodity price risk with futures. In its hedge accounting disclosures, which of the following descriptions would satisfy the requirement for information about the entity's risk management strategy, where the information should include a description of how it establishes the hedge ratio?

The disclosure should describe how the entity establishes the hedge ratio and what the sources of hedge ineffectiveness are, alongside the hedging instruments used and how the economic relationship is determined. Notional amounts or fair values alone do not explain the strategy.

  1. AA description of how the entity establishes the hedge ratio and what the sources of hedge ineffectiveness areCorrect
  2. BA statement only of the notional amount of futures outstanding at year end
  3. CA statement of the fair value of the futures contracts in the balance sheet only
  4. DA description of the credit rating of the exchange clearing house

Explanation

Ind AS 107 states that the information on risk management strategy should include, among other things, a description of how the entity establishes the hedge ratio and what the sources of hedge ineffectiveness are. Notional amounts or fair values alone do not describe the strategy. The clearing house rating is not a listed element.

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