CFM57110 - Derivative contracts: hedging: regulation 7: no designated hedge

This guidance applies to periods of account starting on or after 1 January 2015 where the company has elected for regulation 7 to apply.

Contract not accounted for as a hedge

Assume that the facts are as at CFM57100, in particular that the currency contract was intended to act as a cash flow hedge of the highly probable forecast transaction; but that the company does not treat the currency contract as a hedge for accounting purposes. The fair value movements in the derivative contract are therefore taken directly to the company바카라 사이트™s income statement or profit and loss account rather than reserves. They nonetheless fall within regulation 7, where a company has elected for regulation 7 to apply, because:

  • there is a hedging relationship between the hedging contract and the hedged item; and
  • the hedged item is not fair valued.

In consequence, if a company has elected for regulation 7 to apply, the fair movements are disregarded and brought back into account as in CFM57100.

Hedge ineffectiveness

Suppose that the hedge was not 100% effective as a cash flow hedge of the forecast transaction. For instance, assume in the example at CFM57100 that the sale is delayed until 20 December, but the currency contract still matures on 1 December (and the company does not re-hedge for the remaining 19 days). The difference in timing means that the hedge will not be 100% effective.

The ineffective portion of the gain or loss on the hedging instrument is recognised in the income statement. Nevertheless

  • despite hedge ineffectiveness, there is still a hedging relationship between the currency contract and the forecast transaction, and
  • credits and debits to the income statement, as well as credits or debits to reserves, are included within 바카라 사이트˜all credits and debits representing the whole or part of the fair value profit or loss바카라 사이트™, specified in regulation 7(1)(a).

This means that debits and credits arising from hedge ineffectiveness can be disregarded under regulation 7 where an election has been made.

This contrasts with the situation where a currency contract is split, and only part of the derivative contract is designated as a hedge. This includes not only the case where only part of the notional principal amount of the contract is designated as the hedging instrument, but also the cases where

  • the spot rate element of a currency forward, but not the interest rate element, is designated as a hedging instrument, or
  • the intrinsic value, but not the time value, of a purchased currency option is designated.

There will not be a hedging relationship between the interest rate element of the forward, or the time value of the option, and the hedged item. So fair value changes on these elements - which will be reflected in the income statement - will fall outside of regulation 7.