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CA Final · Financial Reporting · Hedge Accounting

Sagar Steels Ltd hedges the price risk of forecast iron ore purchases using commodity futures. The CFO wants the note on risk management to meet Ind AS 107 requirements for describing how hedging works. Which item is within the information that Ind AS 107 says should be included in the description?

The description should include how the entity determines the economic relationship between the hedged item and the hedging instrument to assess hedge effectiveness. Ind AS 107 also lists the hedging instruments used, how the hedge ratio is set and the sources of ineffectiveness, not broker names or margins.

  1. AThe names of the brokers through which the futures were executed
  2. BHow the entity determines the economic relationship between the hedged item and the hedging instrument for assessing hedge effectivenessCorrect
  3. CThe expected profit margin on the forecast purchases of ore
  4. DThe tax rate applicable to gains on the futures

Explanation

Para 22B lists, among others, a description of the hedging instruments used and how they are used, how the entity determines the economic relationship between hedged item and hedging instrument for assessing effectiveness, and how it establishes the hedge ratio and the sources of ineffectiveness. Broker names, margins and tax rates are not in that list.

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