Route 102 – One man’s year-long journey……Day 40

By Mercia Group
20 March 2015 00:00

To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many).

Day 40 (20 Mar)

In yesterday's blog post, I discussed hedged items and hedging instruments (within section 12 of FRS 102).

Paras 12.16-16C outline the scope for treating items as hedged items. Such items (provided they can be measured reliably) can be:

recognised assets or liabilities

an unrecognised 'firm commitment' (a binding agreement to a future exchange of 'resources' such as a commodity at set quantities, prices and dates)

a 'highly probable' forecast transaction, even where there is no 'firm commitment', or

a net investment in a foreign operation.

Hedge accounting is only appropriate when dealing with an external party, and thus wouldn't apply to an intra-group arrangement except in limited cases (such as where one party is a subsidiary which is, for whatever reason, not being included in the group accounts).

Hedged items can consist of a group of components which met criteria in 12.16B-C (mainly that the risk position is shared by all).

Paras 12.17-12.17C do the same for hedging instruments, which need to be financial instruments measured at FVTPL (see last week's post) and are a contract with an external party (external to the group or individual entity being reported on). Written options are generally excluded from the definition.

Finally, 12.18-18A outline the five conditions for using hedge accounting (the first being that the relationship consists only of a suitable hedged item and hedging instrument). The other four are important to bear in mind:

The hedge must be consistent with the entity's risk management objectives.

There is an 'economic relationship' between the hedged item and hedging instrument (ie they're expected to move in opposite directions in response to the same risk).

There is adequate documentation of the hedging relationship by the entity.

The entity has determined and documented causes of hedge ineffectiveness (ie the degree to which the economic relationship is not perfect).

Phew! Need a break? Why not take a weekend off - I intend to. See you on Monday.

If you missed the last instalment click here

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