in entity b s final financial statements prepared under its previous gaap the forwar 611075

Existing fair value hedges

Case 1: All hedge accounting conditions met from date of transition and thereafter (1)

On 15 November 2011, Entity B entered into a forward contract to sell 50,000 barrels of crude oil to hedge all changes in the fair value of certain inventory. Entity B will apply IAS 39 from 1 January 2012, its date of transition to IFRSs. The historical cost of the forward contract is $nil and at the date of transition the forward had a negative fair value of $50.

In Entity B”s final financial statements prepared under its previous GAAP, the forward was clearly identified as a hedging instrument in a hedge of the inventory and was accounted for as such. The contract was recognised in the balance sheet as a liability at its fair value and the resulting loss was deferred in the balance sheet as an asset. In the period between 15 November 2011 and 1 January 2012 the fair value of the inventory increased by $47. In addition, Entity B met all the conditions in IAS 39 to permit the use of hedge accounting for this arrangement throughout 2012 until the forward expired.

In its opening IFRS statement of financial position Entity B should:

1. continue to recognise the forward contract as a liability at its fair value of $50;
2. derecognise the $50 deferred loss on the forward contract;
3. recognise the crude oil inventory at its historical cost plus $47 (the lower of the change in fair value of the crude oil inventory, $47, and that of the forward contract, $50); and
4. record the net adjustment of $3 in retained earnings.

In addition, hedge accounting would be applied throughout 2012 until the forward expired.

Case 2: All hedge accounting conditions met from date of transition and thereafter (2)

In 2004 Entity C borrowed €10m from a bank. The terms of the loan provide that a coupon of 8% is payable quarterly in arrears and the principal is repayable in 2019. In 2007, Entity C decided to alter its coupon payments for the remainder of the term of the loan by entering into a twelve-year pay-floating, receive-fixed interest rate swap. The swap has a notional amount of €10m and the floating leg resets quarterly based on 3 month LIBOR.

In Entity C”s final financial statements prepared under its previous GAAP, the swap was clearly identified as a hedging instrument in a hedge of the loan and accounted for as such. The fair value of the swap was not recognised in Entity C”s balance sheet and the periodic interest settlements on the swap were accrued and recognised as an adjustment to the loan interest expense.

On 1 January 2012, Entity C”s date of transition to IFRSs, the loan and the swap were still in place and the swap had a negative fair value of €1m and a €nil carrying amount. The cumulative change in the fair value of the loan attributable to changes in 3 month LIBOR was €1.1m, although this change was not recognised in Entity C”s balance sheet because the loan was accounted for at cost. In addition, Entity C met all the conditions in IAS 39 to permit the use of hedge accounting for this arrangement throughout 2012 and 2013.

In its opening IFRS statement of financial position Entity C should:

1. recognise the interest rate swap as a liability at its fair value of €1m; and
2. reduce the carrying amount of the loan by €1m (the lower of the change in its fair value attributable to the hedged risk, €1.1m, and that of the interest rate swap, $1m) to €9m.

In addition, hedge accounting would be applied throughout 2012 and 2013.

Case 3: Hedge terminated prior to date of transition

The facts are as in Case 2 above except that in April 2011 Entity C decided to terminate the fair value hedge and the interest rate swap was settled for its then negative fair value of €1.5m. Under its previous GAAP, Entity C”s stated accounting policy in respect of terminated hedges was to defer any gain or loss on the hedging instrument as a liability or an asset where the hedged exposure remained and this gain or loss was recognised in profit or loss at the same time as the hedged exposure. At the end of December 2011 the unamortised loss recognised as an asset in Entity C”s balance sheet was €1.4m. The cumulative change through April 2011 in the fair value of the loan attributable to changes in 3 month LIBOR that had not been recognised was €1.6m.

In its opening IFRS statement of financial position Entity C should:

1. remove the deferred loss of €1.4m from the balance sheet; and
2. reduce the carrying amount of the loan by €1.4m (the lower of the change in its fair value attributable to the hedged risk, €1.6m, and the change in value of the interest rate swap that was deferred in the balance sheet, €1.4m).

The €1.4m adjustment to the loan would be amortised to profit or loss over its remaining term.

Case 4: Documentation completed after the date of transition

The facts are as in Case 2 above except that, at the date of transition, Entity C had not prepared documentation that would allow it to apply hedge accounting under IAS 39. Hedge documentation was subsequently prepared as a result of which the hedge qualified for hedge accounting with effect from the beginning of July 2012 and through 2013.

As in Case 2, in its opening IFRS statement of financial position Entity C should:

1. recognise the interest rate swap as a liability at its fair value of €1m; and
2. reduce the carrying amount of the loan by €1m (the lower of the change in its fair value attributable to the hedged risk, €1.1m, and that of the interest rate swap, €1m), because the loan was clearly identified as a hedged item.

For the period from January 2012 to June 2012, hedge accounting would not be available. Accordingly, the interest rate swap would be remeasured to its fair value and any gain or loss would be recognised in profit or loss with no offset from remeasuring the loan. With effect from July 2012 hedge accounting would be applied prospectively.