ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments

Zeta plc has a highly probable forecast purchase of inventory in a foreign currency and enters a forward contract to fix the functional currency cost. The relationship qualifies as a cash flow hedge under IFRS 9. At the reporting date the forward contract has a fair value gain of $40,000, and the cumulative change in the present value of the hedged cash flows is $40,000 (so the hedge is fully effective). Where is the $40,000 gain recognised at this date?

The $40,000 gain is recognised in other comprehensive income and held in the cash flow hedge reserve, because under IFRS 9 the effective portion of a cash flow hedge is deferred in equity until the hedged forecast transaction affects profit or loss or a non-financial asset is recognised.

1. AIn profit or loss, because derivatives are always measured at fair value through profit or loss
2. BIn other comprehensive income and accumulated in the cash flow hedge reserveCorrect
3. CAs an adjustment to the carrying amount of inventory, which has not yet been purchased
4. DIn retained earnings directly through the statement of changes in equity