CA Final · Financial Reporting · Hedge Accounting
Sundaram Pharma Ltd hedges commodity price risk on forecast raw material purchases using futures. The CFO asks which description of hedge ineffectiveness is required by Ind AS 107 when a hedging relationship is designated. Which is correct?
The entity must disclose, by risk category, a description of the sources of hedge ineffectiveness that are expected to affect the hedging relationship during its term. This is required up front, not only after ineffectiveness arises, and a one to one hedge ratio does not waive it.
- AA description by risk category of the sources of hedge ineffectiveness expected to affect the hedging relationship during its termCorrect
- BA description of ineffectiveness sources only after ineffectiveness actually arises in profit or loss
- CA description of ineffectiveness sources for the entity as a whole, without separating by risk category
- DA statement that ineffectiveness is nil, if the hedge ratio is one to one
Explanation
Paragraph 23D requires disclosure by risk category of a description of the sources of hedge ineffectiveness expected to affect the relationship during its term. It is forward-looking and by risk category. A one to one ratio does not remove the need to describe sources, so the nil statement is wrong.
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