entity a has borrowed cu4 million for five years at a floating interest rate to fund 612445

Floating to fixed interest rate swaps

Entity A has borrowed CU4 million for five years at a floating interest rate to fund the construction of a building. In order to hedge the cash flow interest rate risk arising from these borrowings, A has entered into a matching pay-fixed receive-floating interest rate swap, based on the same underlying nominal sum and duration as the original borrowing, that effectively converts the interest on the borrowings to fixed rate. The net effect of the periodic cash settlements resulting from the hedged and hedging instruments is as if A had borrowed CU4 million at a fixed rate of interest. Prior to IAS 39, entities simply recognised, on an accruals basis, each periodic net cash settlement in profit or loss.