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Important Developments in Hedge Accounting
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On 16 February 2015, the Ministry of Corporate Affairs has issued a notification for implementation of Indian Accounting Standards (Ind AS, converged with International Financial Reporting Standards (IFRS) The relevant standard for hedge accounting is Ind AS 109 Financial Instruments, which replaces earlier standard Ind AS 39 (AS 30).
The roadmap for implementation of Ind AS was earlier issued by MCA on 02 January 2015, with the following schedule (refer to MCA press release for details).
- For companies with net worth of Rs. 500 cr. implementation is mandatory w e f 01 April 2016
- For listed companies (with debt or equity listed on any stock exchange) with net worth below Rs.500 cr and for all other companies with net worth of Rs. 250 cr and above, implementation is mandatory w e f 01 April 2017
- All companies can voluntarily implement Ind AS w e f 01 April 2015.
Companies for the above purpose include holding companies, subsidiaries, joint ventures and associates, but exclude banking and insurance companies, and NBFCs.
Implementation includes presentation of comparable figures for the previous accounting period.
There are carve-outs, i e where Ind AS standards do not completely conform to IFRS standards, which are not significant, but which may necessitate global Indian companies to prepare two sets of accounts conforming to IFRS and Ind AS for regulatory compliance.
Technically, AS 30 ceases to exist and the only option for companies who have opted for AS 30 till date, is to choose either AS 11 or Ind AS 109 for f y 2015-16, and follow the roadmap thereafter .
Ind AS 109, conforming to IFRS 9, has made extensive change to hedge accounting treatment under AS 30 which conformed to IAS 39. Some of the more important changes are briefly mentioned below:
AS 30
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Ind As 109
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Formal designation and Hedge Document with risk management strategy etc.
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Documentation is similar, but Hedge Document will include hedge effectiveness, with sources of ineffectiveness and how the hedge ratio is determined
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Effectiveness testing – prospective and retrospective, with hedge ratio between 80:125
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Effectiveness is tested for economic relationship at inception and on reporting dates only for forward period – retrospective test is no longer required. The effect of credit risk must not dominate the value changes. Hedge ratio to be consistent with risk management strategy - no prescribed ratio
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Voluntary discontinuation of hedge accounting allowed
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Discontinuation of hedge accounting only under specified circumstances
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Spot approach is permitted for foreign currency hedges (e g intrinsic value at spot)
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Hedged item must be measured at discounted value (PV).
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Embedded derivatives are allowed as hedging instruments
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Derivatives embedded in financial assets are no longer allowed as hedge instrument
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Changes in the time value of option are recognized in P&L account
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Changes in the aligned time value of option are deferred in OCI (Reclassification to P&L depends on whether the hedged item is transaction related or time period related)
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Two alternatives are provided for recognising fair value changes of forward points.
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An additional alternative for recognising fair value changes of forward points is introduced.
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No accounting treatment for currency basis spreads
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Basis spreads are recognized as cost and can be recognized through OCI
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Hedged item – only risk component of financial items can be hedged
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Risk component of non-financial items can also be hedged
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Net positions are not allowed as hedged item
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Net positions can be hedged
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Derivatives cannot be hedged
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Aggregate exposures including derivative can be hedged
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There are also major changes in qualifying criteria, nonfinancial derivatives, presentation and disclosure requirements, as also new concepts like rebalancing of hedge ratio – hence a detailed study of the new standard is essential before implementation.
IFRS 9 was published by IASB in July 2014, but the implementation is made mandatory only from 01 January 2018 and earlier implementation is optional. Mandatory implementation in India therefore is earlier to that in Europe and many other countries – hence there may not be any settled cases for resolving any issues relating to the provisions of the standard.
For any guidance for implementation of Ind AS 109 or for transition from AS 11 / As 30 to Ind AS 109 please approach us. Our valuation team will also be happy to help ongoing valuations with effectiveness measurement.
C. Chandrasekhar
(M) 9820293423
Mail to : c.chandrasekhar@mecklai.com
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