Route 102 – One man’s year-long journey……Day 44

To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many).

Day 44 (26 Mar)

Question: What links this particular blog entry with the reburial of the last Plantagenet king of England? Answer: both take place today in Leicester, and whereas the king in question is Richard the Third, this blog entry deals with Hedge Example the Third. Okay, I was stretching that comparison just a little.

The third example focuses on the third hedge accounting method - that dealing with the net investment in a foreign operation. Once again this example is in the appendix to section 12 and focuses on a loan for, say, $1,200,000 taken out to fund an investment in an overseas subsidiary for the same amount. What might cause hedge ineffectiveness in this scenario? One common example may be an impairment in the investment, which clearly will affect its carrying value but will not affect the loan carrying amount.

The approach to this hedge method is similar to the cash flow hedge approach detailed yesterday, in that equity is adjusted for the lower in absolute terms of the two movements (the exchange retranslation of the loan and the investment). The portion of the hedging instrument gain or loss deemed to be effective is taken to OCI; the balance is taken to P&L.

Finally, discontinuing hedge accounting is dealt with in 12.25-12.25A, and disclosures (principally for hedge accounting) are set out in 12.26-12.29A.

You may well have reached the conclusion that hedge accounting is not for the faint-hearted and you'd be right! One of our FRS 102 transition library modules deals with the topic but notes that you may need to consult with experts in the area (either from one of the bigger firms or from the ICAEW/ACCA) in order to avoid the pitfalls inherent in such a complex area. So you'll be glad to know that we're about to leave behind the thickets of financial instruments for sunnier uplands of the rest of FRS 102! This is my last post for over a week today, as I am off for the first week of the Easter school holiday. Back in April with section 13 Inventory!

P.S. If you missed the last instalment click here