CFM27030 - Accounting for corporate finance: hedging: qualifying hedging instrument
This guidance applies to companies which apply IFRS, New UK GAAP or FRS 26.
Qualifying hedging instruments
A hedging instrument is a designated derivative or, for a hedge of the risk of changes in foreign currency exchange rates only, a designated non-derivative financial asset or non-derivative financial liability, whose movement in fair values or cash flows is expected to offset the movement in fair values or cash flows of a designated hedged item.
Most derivatives can be designated as hedging instruments (provided that the hedge accounting rules are met) except for some written options. A written option exposes the grantor to unlimited downside risk, so it will not normally be effective in reducing the profit or loss exposure of a hedged item, unless designated as an offset to a purchased option.
For hedge accounting purposes, only derivative contracts with an external counterparty may be designated as hedging instruments. 바카라 사이트˜External counterparty바카라 사이트™ means a party external to the entity preparing accounts - so, for a group preparing consolidated accounts, it means a party outside of the group. CFM27040 provides further detail about hedging risks within a group.
Under IAS 39 and FRS 26, a non-derivative financial asset or non-derivative financial liability may be designated as a hedging instrument only for a hedge of a foreign currency risk. Under IFRS 9 and Section 12 of FRS 102, a non-derivative instrument may be designated as a hedging instrument for other risks, but only if it is measured at fair value through profit and loss.
An entity바카라 사이트™s own equity instruments are not financial assets or financial liabilities of the entity and therefore cannot be designated as hedging instruments.
Further rules about what may be designated as a hedging instrument are covered in CFM27050.