Page 22 - 23. COMPILER QB - IND AS 109_32

e. 31 December 2018
Particulars Dr. Amount Cr. Amount (Rs.)

(Rs.)
Loan from bank A/c Dr. 40,000,000
Interest expense (P&L) Dr. 60,000,000
To cash A/c 100,000,000

(Being first instalment of the new loan and payment of
interest accounted for as an adjustment to the amortised cost
of loan)

Q13 (October 18 – 4 Marks)

Discuss the need of hedge accounting and types of various hedges?
SOLUTION

Hedge accounting may be required due to accounting mismatches in:
● Measurement – some financial instruments (non-derivative) are not measured at fair value with changes
being recognised in the statement of profit and loss whereas all derivatives, which commonly are used as
hedging instruments, are measured at fair value
● Recognition – unsettled or forecast transactions that may be hedged are not recognised on the balance

sheet or are included in the statement of profit and loss only in a future accounting period, whereas all
derivatives are recognised at inception.
● Recognition mismatches include the hedge of a contracted or expected but not yet recognised sale,
purchase or financing transaction in a foreign currency and future committed variable interest payments.

Types of hedge accounting
1. Fair value hedge accounting model
● A fair value hedge seeks to offset the risk of changes in the fair value of an existing asset or liability
or an unrecognised firm commitment that may give rise to a gain or loss being recognised in the
statement of profit and loss.

● A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability
or an unrecognised firm commitment, or an identified portion of such an asset, liability or firm
commitment, that is attributable to a particular risk and could affect the statement of profit and loss.
2. Cash flow hedge accounting model
● A cash flow hedge seeks to offset certain risks of the variability of cash flows in respect of an

existing asset or liability or a highly probable forecast transaction that may be reflected in the
statement of profit and loss in a future period.
● A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is attributable to a
particular risk associated with a recognised asset or liability (such as all or some future interest
payments on variable rate debt) or a highly probable forecast transaction or a firm commitment in
respect of foreign currency and (ii) could affect the statement of profit and loss.

23. 21