IFRS 9 Hedge Accounting Notes (Comprehensive)

Which of the following correctly lists the types of hedging relationships?

Fair value hedges, cash flow hedges, and hedges of net investments in foreign operations

In which of the following situations would it be useful for the entity to enter into a forward contract?

Aurora Inc believes the euro may rise relative to the Canadian dollar in the next several months and would like to earn a profit in this increase

Which of the following is the best description of the effect of a fair value hedge on an entity’s financial statements

The change in fair value of the hedging instrument and hedged item offset each other

Which of the following statements correctly describes a notable date for a forward contract?

The settlement date is the date on which the monetary asset or liability resulting from the transaction is settled

On December 1, Year 1, AKM ordered €250,000 in inventory from a supplier in Spain. The goods are scheduled to be delivered on December 15, Year 1, with payment due on February 15, Year 2. The goods were delivered on December 15, Year 1. On December 15, Year 1, AKM entered into a forward contract on the delivery date to purchase €250,000 on February 15, Year 2. The payment was made on February 15. AKM’s year end is December 31. Exchange rate information follows:

Date	Spot rate	Forward rate for delivery on February 15, Year 2
December 1, Year 1	€1 = C$1.3900	€1 = C$1.3975
December 15, Year 1	€1 = C$1.4000	€1 = C$1.3925
December 31, Year 1	€1 = C$1.3800	€1 = C$1.3775
February 15, Year 2	€1 = C$1.3500	€1 = C$1.3500

What is the amount of net foreign exchange gain or loss to be reported on the SCI for the period ended December 31, Year 1, if AKM does not elect to use hedge accounting?

The accounts payable is initially recorded on December 15, Year 1, at the spot rate (€1 = C$1.4000). At year end, it is updated to the current spot rate (€1 = C$1.3800).

In addition, the variable side of the forward contract is initially recorded at the forward rate on the initiation date (€1 = C$1.3925) and it is updated to the forward rate at the reporting date (€1 = C$1.3775).

Change in accounts payable value = €250,000 × (1.4000 – 1.3800) = $5,000 gain;

Change in forward contract = €250,000 × (1.3925 – 1.3775) = $3,750 loss;

Net impact = $1,250 gain ($5,000 – $3,750).

Which of the following correctly describes an eligible hedged item?

An item that the entity wants to protect from exposure to a variable rate

Which of the following adjustments is required at year end for a forward contract when using the gross method?

The variable side of the forward contract is updated to the forward rate on the reporting date

Which of the following is a qualifying criterion that must be met for hedge accounting to be used?

The hedging relationship must  be formally designated and documented at the inception of the hedge

Which of the following correctly describes hedging?

A risk management process that involves identifying and quantifying a risk and then taking a specific action to offset that risk

An entity makes a sale denominated in U.S. dollars and enters into a forward contract to hedge the changes in the exchange rate prior to the recognition of the sale in the following fiscal year. Which of the following best describes how hedge accounting affects the entity’s accounting for these transactions?

Hedge accounting allows the sale to the customer and the forward contract to be treated as linked transactions