22 Hedging s22 - FINAL

Solutions to GAAP: Graded Questions Hedge accounting
Solution 22.1
a.
1. If we have hedged a transaction and the criteria for hedge accounting are met, we must
account for the hedge in terms IFRS 9 Financial instruments.
2. Hedge accounting may be applied to any hedging relationship if it is between an eligible
hedged item and a hedging instrument.
3. The application of hedge accounting is entirely voluntary.
4. We may only cease hedge accounting if certain criteria are met.
a) Only 1 is correct
b) Only 1 and 4 are correct
c) Only 2 and 3 are correct
d) Only 3 and 4 are correct
e) None of the options (a-d) are correct
Answer: (d)
Explanation: Only statements 3 and 4 are correct.

• Statement 1 is incorrect: Hedge accounting is voluntary. See IFRS 9.6.4.1
• Statement 2 is incorrect: The existence of a hedging relationship between a hedged item
and a hedging instrument is just one of the criteria that must be met before we may
apply hedge accounting . See IFRS 9.6.4.1
• Statement 3 is correct: See IFRS 9.6.4.1
• Statement 4 is correct: See IFRS 9.6.5.6
b.
When accounting for an forward exchange contract that has been entered into in order to hedge
against the risks associated with a firm commitment, the forward exchange contract is called
the hedging instrument and the firm commitment is called the hedged item.
a) True
b) False
Answer: (a)
c.
When accounting for a hedge as a cash flow hedge, we have the choice of processing a basis
adjustment or reclassification adjustment.
a) True
b) False
Answer: (b)
Explanation: The statement is false.

• We do not have a choice between using a basis adjustment or reclassification adjustment.
− If the underlying transaction is a financial asset or liability, then we must use the
reclassification adjustment, whereas
− If the underlying transaction is a non-financial asset or liability, then we must use the
basis adjustment.
© Service & Kolitz, 2022-2023 Chapter 22: Page 1

Solution 22.1 continued …

d.
A hedge of a highly probable forecast transaction:
a) must be accounted for as a cash flow hedge.
b) may be accounted for as a cash flow hedge or fair value hedge.
c) must be accounted for as a fair value hedge.
d) must be accounted for as a fair value hedge in the event that the hedge is to manage foreign
currency risk, failing which it is accounted for as a cash flow hedge.
e) none of the options (a-d) are correct.
Answer: (a)
Explanation:
A hedge of a highly probable forecast transaction must be accounted for as a cash flow
hedge See IFRS 9.6.5.2
e.
a) When accounting for a cash flow hedge, any gains or losses are immediately recognised in P/L.
b) When accounting for a cash flow hedge, any gains or losses are immediately recognised in
other comprehensive income and then transferred directly to equity, either on transaction
date or when the hedged item is derecognised.
c) When accounting for a cash flow hedge, any gains or losses are first recognised in other
comprehensive income and then reclassified to profit or loss when the non-financial asset
affects profit or loss.
d) When accounting for a cash flow hedge, any gains or losses are first recognised in other
comprehensive income and then, in the case of a non-financial asset, the gain or loss is
transferred from other comprehensive income to the cost of the non-financial asset on
transaction date.
e) None of the options (a-d) are correct.
Answer: (d)
Explanation:
• Statement 1 is incorrect because gains or losses on a cash flow hedge must be initially
recognised in OCI – not P/L
• Statement 2 is incorrect because the gain or loss in OCI must eventually be transferred
to P/L, whether directly or indirectly.
• Statement 3 is incorrect because the transfer to profit or loss described in the statement is a
reclassification adjustment, which may only be used for financial assets or liabilities.
• Statement 4 is correct.
f.
The gain or loss on a hedging instrument that has accumulated in the cash flow hedge reserve account
would be reversed out of the cash flow hedge reserve using a reclassification adjustment in the event that
the hedge had involved a highly probable forecast transaction that had now resulted in the recognition
of a non-financial asset or liability.
Answer: (b)
Explanation:
Gains or losses that have accumulated in the cash flow hedge reserve account would have
to be reversed out of other comprehensive income using a basis adjustment if the
underlying transaction involved the acquisition of a non-financial asset or liability (i.e.
the reclassification adjustment may only be used if the underlying transaction involved
a financial asset or liability). See IFRS 9.6.5.11(d)

Solution 22.2
Part A: no FEC
YEN (¥)
Calculations Debit/ (Credit)
1 October 20X4: transaction date

Plant: cost RUB360 000 x 1,75 SR on TD 630 000
Foreign creditor (630 000)
Acquisition of plant
31 December 20X4: reporting

date
Foreign exchange loss (P/L) RUB360 000 x 1,85 SR on RD - 36 000
Foreign creditor RUB360 000 x 1,75 Prior SR (36 000)
Restatement of creditor at year end
Depreciation (P/L) (¥630 000 – 0)/ 10 x 1/12 5 250

Plant: accumulated depreciation (5 250)
(A)
Depreciation of plant
1 March 20X5: settlement date

Foreign exchange loss (P/L) RUB360 000 x 1,90 SR on SD – 18 000
Restatement of creditor on settlement date
Foreign creditor RUB360 000 x 1,90 SR on SD 684 000

Bank (684 000)
Settlement of the creditor
31 December 20X5: year-end

Depreciation (P/L) (¥630 000 – 0) / 10 x 1 63 000
Plant: accumulated depreciation (63 000)
(A)
Spot: 1,75 1,85 1,90

TD RD: Y/E Settle
1 Oct 31 Dec 1 Mar
Key:
FC: firm commitment, or if you see FC on the timeline, it refers to the date on which FC was
entered into
FEC: forward exchange contract, or if you see FEC on the timeline, it refers to the date on
which FEC was entered into
SR: spot rate
TD: transaction date
RD: reporting date (e.g. YE = year-end)
SD: settlement date

Part B: with an FEC YEN (¥)

Debit/ Credit)
1 October 20X4: transaction date
Plant: cost RUB360 000 x 1,75 SR on TD 630 000
Foreign creditor (630 000)
Acquisition of plant

Foreign exchange loss (P/L) RUB360 000 x 1,85 SR on RD - 16 000
Foreign creditor RUB360 000 x 1,75Prior SR (16 000)
Restatement of the foreign creditor at year end
FEC asset RUB360 000 x 2,10 FR on RD – 108 000

Foreign exchange gain (P/L) RUB360 000 x 1,80 FR obtained (108 000)
Foreign exchange gain on the fair value hedge
Depreciation (P/L) (¥630 000 – 0)/ 10 x 1/12 5 250

Plant: accumulated depreciation (A) (5 250)
1 March 20X5: settlement date

Foreign exchange loss (P/L) RUB360 000 x 1,90 SR on SD – 18 000
Restatement of the creditor at settlement date
Foreign exchange loss: FEC (P/L) RUB360 000 x 1,90 SR on SD – 72 000

FEC asset RUB360 000 x 2,10 Prior FR (72 000)
Forex loss on the fair value hedge
Foreign creditor RUB360 000 x 1,90 SR on SD 684 000

Bank (684 000)
Bank Balance in the FEC Asset a/c: 108 000 – 72 000 36 000
FEC asset Or: RUB360 000 x 1,90 SR on expiry – (36 000)
RUB360 000 x 1,80 FR obtained
Settlement of the foreign creditor and receipt from financing house on expiry of FEC

Depreciation (P/L) (¥630 000 – 0) / 10 x 1 63 000
Plant: accumulated depreciation (A) (63 000)
Spot: 1,75 1,85 1,90

FEC
TD RD: YE Settle
1 Oct 31 Dec 1 Mar
FEC: 1,80 2,10 N/A
Comment: This question shows us how to account for the importation of an item of PPE
(A) without an FEC; and then
(B) with an FEC.
Note how Part B simply includes additional journals for the FEC. Take a careful look and see how the
FEC hedges against the movements in the spot exchange rates (i.e. a forex loss was caused by the
movement in the spot rates that caused the creditor balance to increase by ¥54 000 but the FEC partially
offset this with the gain of ¥36 000). The net effect is that the Japanese company paid ¥648 000 (¥684 000
to the creditor but receiving ¥36 000 from the financing house) and thus it 'locked in' at the forward rate
of ¥1,80: RUB1 (¥1,80 x RUB360 000).

Solution 22.3
a) Journals Debit/ Credit

30 Nov 20X5: FEC entered Calculations
into
No entries
31 Dec 20X5: reporting date
FEC asset $270 000 x 14.22 FR on RD – 43 200
Cash flow hedge reserve (OCI) $270 000 x 14.06 FR obtained 43 200
CFH: HPFT: gain on reporting date recognised in OCI
1 Feb 20X6: transaction date
FEC asset $270 000 x 14.24 FR on TD – 5 400
Cash flow hedge reserve (OCI) $270 000 x 14.22 FR on RD (Prior FR) 5 400
CFH: HPFT: gain on transaction date recognised in OCI
Inventory $270 000 x 14.19 SR on TD 3 831 300
Foreign creditor 3 831 300
Import of the inventory
Cash flow hedge reserve (OCI) R43 200 + R5 400 48 600
Inventory 48 600
CFH: Basis adjustment: gain in OCI transferred to non-financial asset
1 April 20X6: settlement date
FEC asset $270 000 x 14.26 SR on SD – 5 400
Foreign exchange gain (P/L) $270 000 x 14.24 FR on TD (Prior FR) 5 400
FVH: gain on settlement date recognised in P/L
Foreign exchange loss (P/L) $270 000 x 14.26 SR on SD – 18 900
Foreign creditor $270 000 x 14.19 SR on TD (Prior SR) 18 900
Re-measurement of the foreign creditor at spot rate on settlement date
Foreign creditor $270 000 x 14.26 SR on SD 3 850 200
Bank 3 850 200
Bank Bal in FEC A/L a/c: 54 000
FEC asset R43 200 + R5 400 + R5 400; OR 54 000
$270 000 x 14.26 SR on expiry –
$270 000 x 14.06 FR obtained
Settlement of the foreign creditor and receipt from financing house on
expiry of the FEC
1 July 20X6: first sale of inventory
Debtor Given 3 200 000
Revenue from sales 3 200 000
Cost of sales (R3 831 300 – R48 600) x 70% 2 647 890
Inventory 2 647 890
Sale of inventory
5 August 20X6: second sale of inventory
Debtor Given 1 600 000
Revenue from sales 1 600 000
Cost of sales (R3 831 300 – R48 600) x 30% 1 134 810
Inventory 1 134 810
Sale of inventory

b) Disclosure
TUBBIE LIMITED
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X6
20X6
R
Revenue: sales (3 200 000 + 1 600 000) 4 800 000
Cost of sales (2 647 890 + 1 134 810) (3 782 700)
Gross profit 1 017 300
Foreign exchange gain: FEC 5 400
Foreign exchange loss: restatement of creditor (18 900)
Profit for the period 1 003 800
Other comprehensive income: (43 200)
Items that will be reclassified to profit or loss: 0
Items that will not be reclassified to profit or loss:
- Cash flow hedge, net of tax (ignored) 30 (43 200)
Total comprehensive income 960 600
TUBBIE LIMITED
STATEMENT OF CHANGES IN EQUITY
OCI: Cash Retained Total
flow hedge earnings equity
R R R
Balance 31/12/X5 xxx xxx xxx
Total comprehensive income From statement of comprehensive income (43 200) 1 003 800 960 600
TUBBIE LIMITED
NOTES TO THE FINANCIAL STATEMENTS
20X6
R
Note 30 Other comprehensive income: cash flow hedge reserve
Gain on cash flow hedge recognised in OCI See journals 5 400
Tax effect of gain in OCI Ignored (0)
Basis adjustment: Gain on cash flow hedge transferred
from OCI to initial cost of asset acquired See journals (48 600)
Tax effect of basis adjustment Ignored (0)
(43 200)

A timeline that you may find useful:
FEC/ HPFT RD: Y/E TD SD

30 Nov 31 Dec 1 Feb 1 April
Spot: 14.02 14.09 14.19 14.26
FEC: 14.06 14.22 14.24 N/A
Comment:
• The hedge of a highly probable forecast transaction is always accounted for as a cash flow hedge
and thus the question did not need to state this fact.
• Since the forecast transaction involved the acquisition of a non-financial (inventory), the OCI must
be reversed using a basis adjustment (i.e. transferred on transaction date to the initial carrying amount
of the acquired asset)
Key:
HPFT: highly probable forecast transaction
SR: spot rate
RD: reporting date (e.g. YE)
SD: settlement date

Solution 22.4
a) Hedge of the firm commitment is a cash flow hedge
Calculations Debit Credit

30 September 20X5
No entry as the FEC has not yet had time to either gain or lose value.
28 February 20X6 (reporting date: year-end)

Cash flow hedge reserve (E: OCI: Eq) €300 000 × 7.22 FR on RD – 69 000
FEC asset/ liability €300 000 × 7.45 FR obtained 69 000
CFH: FC: loss on FEC on reporting date, recognised in OCI
31 March 20X6 (transaction date)

FEC asset/ liability €300 000 × 7.43 FR on TD – 63 000
Cash flow hedge reserve (I: OCI: Eq) €300 000 × 7.22 FR on RD (Prior FR) 63 000
CFH: FC: gain on FEC on transaction date, recognised in OCI
Equipment: cost (A) €300 000 × 7.40 SR on TD 2 220 000

Foreign creditor (L) 2 220 000
Equipment purchased
Equipment: cost (A) CFHR balance: R69 000 – R63 000 6 000
Cash flow hedge reserve (Eq bal) 6 000
CFH: Basis adjustment: balance in CFHR (representing a net loss)
transferred to the cost of the asset acquired – P.S. because equipment is a
non-fin asset, we must use the basis adjustment
30 April 20X6 (installation date)

Equipment: cost (A) 648 000 + 70 000 718 000
Bank €80 000 × 8.10 SR on installation date 648 000
Bank Given – billed in rands & pd separately 70 000
Capitalisation of installation fee and hotel bill (directly attributable since
sufficiently qualified local technicians not available)
30 June 20X6 (expiry of FEC and settlement of foreign creditor)

FEC asset/ liability €300 000 × 7.60 SR on SD – 51 000
Foreign exchange gain (P/L) €300 000 × 7.43 FR on TD (Prior FR) 51 000
FVH: gain on FEC on maturity (also referred to as expiry date/ settlement
date), recognised in P/L
Foreign exchange loss (P/L) €300 000 × 7.60 SR on SD – 60 000

Foreign creditor (L) €300 000 ×7.40 SR on TD (Prior SR) 60 000
Re-measurement foreign creditor on settlement date
Foreign creditor (L) €300 000 × 7.60 SR on SD 2 280 000

Bank 2 280 000
Bank FEC asset bal: 45 000
63 000 Dr + 51 000 Dr – 69 000 Cr
FEC asset/ liability €300 000 x 7,60 SR on expiry – 45 000
€300 000 x 7,45 FR obtained
Settlement of foreign creditor and receipt from financing house on expiry
of FEC
28 February 20X7 (year-end)

Depreciation (P/L) (2 220 000+6 000+718 000 – 0) ÷5yrs ×10/12 490 667
Equipment: accum. depreciation (A) 490 667
Depreciation for the year - available for use from 30 April 20X6

a) Continued …
FEC/ FC RD: Y/E TD SD

30 Sept X5 28 Feb X6 31 Mar X6 30 June X6
Spot: 7.50 7.20 7.40 7.60
FEC 7.45 7.22 7.43 7.60
Comment:
• Shipment on a 'delivery duty paid' basis (DDP) means that the transaction date occurs when:
- the goods have been delivered safely to the destination port; and
- the customs clearance certificates have been obtained by the seller.
• The FEC was only entered into when we entered into a firm commitment (i.e. there was no hedge
when we were dealing with a highly probable forecast transaction).
• Depreciation begins from the date the property, plant and equipment first becomes available for use
– thus depreciation begins from 30 April 20X6.
• A highly probable forecast transaction existed from 1 September 20X5 until 30 September 20X5,
when it then became a firm commitment. Please note that we do not recognise highly probable
forecast transactions. We would only process journals if a HPFT was hedged, (P.S. this would also
mean that any journals processed would be recording details relating to the hedge rather than the
HPFT). In this question, however, the FEC hedge was only entered into from the date it became a
firm commitment (FC). Thus, there are no journals processed on 1 September.
Key:
FC: firm commitment, or if you see FC on the timeline, it refers to the date on which FC was
entered into
SR: spot rate
SD: settlement date

b) Hedge of the firm commitment is a fair value hedge
30 September 20X5 Calculations Debit Credit

No entry as the FEC has not yet had time to either gain or lose value.
Foreign exchange loss (E: P/L) €300 000 × 7.22 FR on RD – 69 000
FEC asset/ liability €300 000 × 7.45 FR obtained 69 000
FVH: FEC: loss on FEC on reporting date, recognised in P/L
Firm commitment asset/ liability €300 000 × 7.20 SR on RD – 90 000

Foreign exchange gain (I: P/L) €300 000 × 7.50 SR on FC date 90 000
FVH: FC: gain on FC on reporting date, recognised in P/L
31 March 20X6 (transaction date)

FEC asset/ liability €300 000 × 7.43 FR on TD – 63 000
Foreign exchange gain (I: P/L) €300 000 × 7.22 FR on RD (Prior FR) 63 000
FVH: FEC: gain on FEC on transaction date, recognised in P/L
Foreign exchange loss (E: P/L) €300 000 × 7.40 SR on TD – 60 000

Firm commitment asset/liability €300 000 × 7.20 SR on RD (Prior SR) 60 000
FVH: FC: loss on FC on reporting date, recognised in P/L
Equipment: cost (A) €300 000 × 7.40 SR on TD 2 220 000

Equipment purchased
Equipment: cost (A) Balance in the FC A/L account: 30 000

Firm commitment asset 90 000 (A) – 60 000 (L) 30 000
FVH: FC: FC net asset is derecognised and recognised as an adjustment
to the carrying amount of the acquired asset
30 April 20X6 (installation date)

Equipment: cost (A) 648 000 + 70 000 718 000
Bank €80 000 × 8.10 SR on installation date 648 000
Bank Given – billed in rands & pd separately 70 000
Capitalisation of installation fee and hotel bill (directly attributable
since local technicians not available)
30 June 20X6 (expiry of FEC and settlement of foreign creditor)

FEC asset/ liability €300 000 × 7.60 SR on SD – 51 000
Foreign exchange gain (I: P/L) €300 000 × 7.43 FR on TD (Prior FR) 51 000
FVH: gain on FEC on maturity (expiry date/ settlement date),
recognised in P/L
Foreign exchange loss (E: P/L) €300 000 × 7.60 SR on SD – 60 000

Foreign creditor €300 000 ×7.40 SR on TD (Prior SR) 60 000
Re-measurement of foreign creditor on settlement date
Foreign creditor €300 000 × 7.60 SR on SD 2 280 000

Bank 2 280 000
Bank FEC asset bal: 45 000
63 000 Dr + 51 000 Dr – 69 000 Cr
FEC asset/ liability Or: €300 000 x 7,60 SR on expiry – 45 000
€300 000 x 7,45 FR obtained
Settlement of foreign creditor & receipt from bank on expiry of FEC

Depreciation (E: P/L) (2 220 000+30 000 + 718 000 – 0) ÷5yrs ×10/12 494 667
Equipment: accum. deprec. (-A) 494 667
Depreciation for the year - available for use from 30 April 20X6

b) Continued …
FEC/ FC RD: Y/E TD SD

30 Sept X5 28 Feb X6 31 Mar X6 30 June X6
Spot: 7.50 7.20 7.40 7.60
FEC 7.45 7.22 7.43 7.60
Comment:
• Shipment on a 'delivery duty paid' basis (DDP) means that the transaction date occurs when:
- the goods have been delivered safely to the destination port; and
- the customs clearance certificates have been obtained by the seller.
• The FEC was only entered into when we entered into a firm commitment (i.e. there was no hedge
when we were dealing with a highly probable forecast transaction).
• Depreciation begins from the date the property, plant and equipment first becomes available for use
– thus depreciation begins from 30 April 20X6.
• A highly probable forecast transaction existed from 1 September 20X5 until 30 September 20X5,
when it then became a firm commitment. Please note that we do not recognise highly probable
forecast transactions. We would only process journals if a HPFT was hedged, (P.S. this would also
mean that any journals processed would be recording details relating to the hedge rather than the
HPFT). In this question, however, the FEC hedge was only entered into from the date it became a
firm commitment (FC). Thus, there are no journals processed on 1 September.
Key:
FC: date on which FC was entered into, or if you see FC on the timeline, it refers to the date
on which FC was entered into
SR: spot rate
SD: settlement date

Solution 22.5
Rand (R)
a) Journals Debit Credit
3 February 20X5 (date FEC entered into)

No journal entry
10 February 20X5 (transaction date)

Machine: cost (A) $2 200 000 x 10.80 SR on TD 23 760 000
Purchase of machine from a foreign creditor
FEC asset (A) $2 200 000 x 11.00 FR on TD – 1 650 000

Cash flow hedge reserve (OCI) $2 200 000 x 10.25 FR obtained 1 650 000
CFH: HPFT: gain on FEC on transaction date, recognised in OCI
Cash flow hedge reserve (Eq) Balance in the CFH reserve account 1 650 000
Machine: cost (A) 1 650 000
CFH: HPFT: basis adjustment: CFHR derecognised and recognised as
an adjustment to the acquired asset – note that this adjustment is made
directly from equity and does not appear in OCI

Foreign exchange loss (P/L: E) $2 200 000 x 12.00 SR on RD – 2 640 000
Foreign creditor (L) $2 200 000 x 10.80 SR on TD (Prior SR) 2 640 000
Re-measurement of foreign creditor at year-end
FEC asset (A) $2 200 000 x 12.10 FR on RD – 2 420 000

Foreign exchange gain (P/L: I) $2 200 000 x 11.00 FR on TD (Prior FR) 2 420 000
FVH: FEC: gain on FEC on reporting date, recognised in P/L
31 March 20X5 (settlement date)

Foreign exchange loss (P/L: E) $2 200 000 x 13.80 SR on SD – 3 960 000
Foreign creditor (L) $2 200 000 x 12.00 SR on RD (Prior SR) 3 960 000
Re-measurement of foreign creditor on payment date
FEC asset (A) $2 200 000 x 13.80 SR on SD – 3 740 000

Foreign exchange gain (P/L: I) $2 200 000 x 12.10 FR on RD (Prior FR) 3 740 000
FVH: FEC: gain on FEC on settlement date, recognised in P/L
Foreign creditor (L) $2 200 000 x 13.80 SR on SD 30 360 000

Bank 30 360 000
Bank Bal in FEC asset a/c: 1 650 000 + 7 810 000
FEC asset (A) 2 420 000 + 3 740 000; OR 7 810 000
$2 200 000 x 13,80 SR on expiry –
$2 200 000 x 10,25 FR obtained
Settlement of creditor and receipt from bank on expiry of FEC

Depreciation – machine (P/L: E) (23 760 000 – 1 650 000 – RV: 0) x 10% x 2 211 000
Machine: acc depreciation (-A) 12/12 2 211 000
Depreciation of machine (Please note that this depreciation is in the
20X6 financial year)

Solution 22.5 continued ...
b) Disclosure
KATERINA LIMITED
FOR THE YEAR ENDED 28 FEBRUARY 20X5
20X5
Calculations: R
Sales xxx
Cost of sales xxx
Gross profit xxx
Foreign exchange loss on foreign creditor (2 640 000)
Foreign exchange gain on forward exchange contract 2 420 000
Profit or loss for the year xxx
Other comprehensive income for the year, net of tax 0
• Items that will not be reclassified to profit or loss:
− Cash flow hedge, net of tax Tax was ignored in this ques 1 650 000
− Gain on cash flow hedge Jnl: $2 200 000 x (11.00 – 1 650 000
10.25)
• Items that will be reclassified to profit or loss: N/A in this question 0
Total comprehensive income for the year xxx
KATERINA LIMITED
STATEMENT OF FINANCIAL POSITION
AS AT 28 FEBRUARY 20X5
20X5
R
ASSETS
Non-current assets:
Plant 23 760 000-1 650 000 Note 1 22 110 000
Current assets:
FEC asset 1 650 000+2 420 000 4 070 000
xxx
EQUITY AND LIABILITIES
Issued capital and reserves From SOCIE xxx
Liabilities
Non-current liabilities: xxx
Current liabilities:
Foreign creditor 23 760 000+2 640 000 26 400 000
xxx
Note 1: There was no depreciation on this plant during the year ended 28 February 20X5 because,
although we had taken ownership and had thus recognised the plant, it had not yet arrived and was thus
not yet available for use.

Solution 22.6
Part A
Journals
Rand (R)
Debit Credit
13 September & 30 September 20X4 (firm commitment date & FEC date,
respectively)
No entries
31 December 20X4 (reporting date: year-end)

Cash flow hedge reserve (OCI) €330 000 x 15,90 FR on RD – 363 000
FEC liability (L) €330 000 x 14,80 FR obtained 363 000
CFH: firm commitment: loss on reporting date, recognised in OCI

Foreign debtor (A) €330 000 x 16,70 SR on TD 5 511 000
Revenue: sale (I: P/L) 5 511 000
Sale of vehicle (inventory)
Cost of sales (E: P/L) Given 2 475 000

Inventory (A) 2 475 000
Cost of goods sold
Cash flow hedge reserve (OCI) €330 000 x 16,50 FR on TD – 198 000
FEC liability (L) €330 000 x 15,90 FR on RD (Prior FR) 198 000
CFH: firm commitment: loss on transaction date recognised in OCI
FEC loss (E: P/L) Balance in the CFH Reserve account: 561 000
Cash flow hedge reserve (OCI) 363 000 + 198 000 561 000
CFH: Reclassification adjustment: underlying transaction involves a financial
asset and thus the loss in the CFHR is reclassified to P/L (this must be done
through OCI)

Foreign exchange loss (E: P/L) €330 000 x 15,50 SR on SD – 396 000
Foreign debtor (A) €330 000 x 16,70 SR on TD (Prior SR) 396 000
Re-measurement of debtor on settlement date
FEC liability (L) €330 000 x 15,50 SR on SD – 330 000

Foreign exchange gain (I: P/L) €330 000 x 16,50 FR on TD (Prior FR) 330 000
FVH: gain on settlement date, recognised in P/L
Bank €330 000 x 15,50 SR on SD 5 115 000

Foreign debtor (A) 5 115 000
FEC liability (L) Bal in FEC liab a/c: 231 000
Bank R363 000 + R198 000 – R330 000; OR 231 000
€330 000 x 15,50 SR on expiry –
€330 000 x 14,80 FR obtained
Settlement received from debtor and payment to financing house
upon expiry of FEC
Note: The sale was on a 'delivery at terminal' basis (DAT) and thus the transaction date is taken to be
5 February 20X5, because this would be the date that the inventory qualified for recognition as an asset
(‘control’ will have transferred to Pendragon on this date – one of the identifying features of ‘control’ is
‘risks and rewards of ownership’, and the risks and rewards of ownership in a DAT delivery transfer
when the goods are safely delivered to the destination terminal: 5 February 20X5).


Part B
a) Pendragon Limited's decision on 5 January 20X5 that it would prefer not to apply hedge
accounting would have no effect on the journals because once hedge accounting is applied,
it may not be discontinued unless the qualifying criteria cease to be met.
b) On 15 January 20X5, the qualifying criteria are no longer met and thus hedge accounting
must stop from this date (i.e. hedge accounting must stop prospectively).
Since the hedge has been accounted for as a cash flow hedge, there is a balance in the cash
flow hedge reserve account, which is part of 'other comprehensive income'. The amount in
the cash flow hedge reserve account must be transferred out, but the timing of this transfer
depends on whether the forecast transaction is still expected to occur or not:
• if the forecast transaction is no longer expected to occur, it must be reclassified to profit
or loss immediately; but
• if the forecast transaction is still expected to occur, the transfer out of the cash flow hedge
reserve account is not done immediately but is accounted for in the normal way – in other
words:
− using a reclassification adjustment, if the underlying transaction involves a financial asset
or liability or is a loss that the entity expects will be irrecoverable; or
− using a basis adjustment, if the underlying transaction involves a non-financial asset or
liability. See IFRS 9.6.5.12
Since the forecast sale is still expected to occur, the amount in the cash flow hedge reserve
account must remain untouched until the sale occurs.
From 15 January 20X5 onwards, the forward exchange contract is no longer accounted for
as a hedging instrument but rather as:
• a derivative financial instrument with
• fair value gains or losses recognised in profit or loss.
The journals will be the same until 15 January 20X5, where we will have to value the FEC
for the last time as a cash flow hedge. Since the transaction is still expected to occur, this
cash flow hedge reserve account is not reclassified to profit or loss immediately.
From this date, the FEC is presented as a derivative financial instrument but continues to
be measured in the same way. However, the changes in its value are now recognised as fair
value gains or losses in profit or loss – they are no longer recognised in other comprehensive
income. On the date of the forecast sale, the amount in the cash flow hedge reserve account
will be reclassified to profit or loss, in the same way as if hedge accounting had not been
discontinued – however, the amount in the cash flow hedge reserve that is reclassified on
this date differs from the amount had hedge accounting not been discontinued: it is now
R528 000 (see calculation 1) instead of R561 000 (see calculation 2 or the 1st and 4th journal
or the 5th journal in part A). This is because we had stopped accounting for the changes in
the value of the FEC in other comprehensive income from 15 January 20X5.
Calculations:
1. €330 000 x FR available on discontinuance of hedge accounting: 16.40 - €330 000 x FR obtained: 14.80
= R528 000
2. €330 000 x FR available on transaction date: 16.50 - €330 000 x FR obtained: 14.80 = R561 000


Part B continued …
c) Journals after hedge accounting was discontinued on 15 January 20X5:
Rand (R)
13 September & 30 September 20X4 (firm commitment date & FEC date, Debit Credit
respectively)
No entries
Cash flow hedge reserve (OCI) €330 000 x 15,90 FR on RD – 363 000
FEC liability (L) €330 000 x 14,80 FR obtained 363 000
CFH: Firm commitment: loss on reporting date, recognised in OCI
15 January 20X5 (discontinuance of hedge accounting)
Cash flow hedge reserve (OCI) €330 000 x 16,40 FR on discontinuance – 165 000
FEC liability (L) €330 000 x 15,90 FR on RD – 165 000
CFH: Firm commitment: loss on reporting date, recognised in OCI
Foreign debtor (A) €330 000 x 16,70 SR on TD 5 511 000
Revenue: sale (I: P/L) 5 511 000
Sale of vehicle (inventory)
Cost of sales (E: P/L) Given 2 475 000
Cost of goods sold
Fair value loss (E: P/L) €330 000 x 16,50 FR on TD – 33 000
FEC liability (L) €330 000 x 16,40 FR on discontinuance 33 000
Remeasuring the FEC, a derivative financial instrument, in P/L
FEC loss (E: P/L) Balance in the CFH Reserve account: 528 000
Cash flow hedge reserve (OCI) 363 000 + 165 000 528 000
CFH: Reclassification adjustment: underlying transaction involves a financial
asset and thus the loss in the CFHR is reclassified to P/L (this must be done
through OCI)
Foreign exchange loss (E: P/L) €330 000 x 15,50 SR on SD – 396 000
Foreign debtor (A) €330 000 x 16,70 SR on TD (Prior SR) 396 000
Re-measurement of debtor on settlement date
FEC liability (L) €330 000 x 15,50 SR on SD – 330 000
Fair value gain (I: P/L) €330 000 x 16,50 FR on TD (Prior FR) 330 000
Remeasuring the FEC, a derivative financial instrument, in P/L
Bank €330 000 x 15,50 SR on SD 5 115 000
Foreign debtor (A) 5 115 000
FEC liability (L) Bal in FEC liab a/c: 231 000
Bank R363 000 + R165 000 +R33 000 – 231 000
R330 000; OR
€330 000 x 15,50 SR on expiry –
€330 000 x 14,80 FR obtained
Settlement received from debtor and payment to financing house on expiry of
FEC

Solution 22.7
Part A
a) Journal entries 20X5, 20X6 and 20X7

Australian Dollar (A$)
01 December X5: date FEC entered into (an uncommitted period) Debit Credit
No entries
31 December X5: reporting date (year-end)
FEC asset/ liability (A) R675 000 x 10.21 FR at RD – 60 750
Cash flow hedge reserve (OCI) R675 000 x 10.12 FR obtained 60 750
CFH: HPFT: gain on reporting date recognised in OCI
01 February X6: firm commitment date (uncommitted forecast period ends)

Cash flow hedge reserve (OCI) R675 000 x 10.05 FR on FC date – 108 000
FEC asset/ liability (A to L) R675 000 x 10.21 FR on RD (Prior FR) 108 000
CFH: HPFT: loss on FEC on firm commitment date, recognised in OCI
15 February X6: transaction date (firm commitment period ends)

Cash flow hedge reserve (OCI) R675 000 x 10.01 FR on TD – 27 000
FEC asset/ liability (L) R675 000 x 10.05 FR on FC date (Prior FR) 27 000
CFH: FC: loss on FEC on transaction date, recognised in OCI
Equipment: cost (A) R675 000 x 9.99 SR on TD 6 743 250

Import of the equipment
Equipment: cost (A) A$60 750 Cr – A$108 000 Dr – A$27 000 Dr 74 250
Cash flow hedge reserve (Eq) 74 250
CFH: Basis adjustment: underlying transaction involves a non-financial asset and thus the
CFHR (equity) is derecognised and recognised as an adjustment to the cost of the acquired
asset (Note: this adj occurs directly in equity without affecting OCI, thus it appears in the
SOCIE but not the SOCI)
31 May X6: settlement date (FEC expires)

Foreign exchange loss (E: P/L) R675 000 x 9.96 SR on SD – 33 750
FEC asset/ liability (L) R675 000 x 10.01 FR on TD (Prior FR) 33 750
FVH: loss on FEC on settlement date, recognised in profit or loss
Foreign creditor (L) R675 000 x 9.96 SR on SD – 20 250

Foreign exchange gain (I: P/L) R675 000 x 9.99 SR on TD (Prior SR) 20 250
Remeasurement of foreign creditor at spot rate on settlement date
Foreign creditor (L) R675 000 x 9.96 SR on SD 6 723 000
Bank 6 723 000
FEC liability (L) Bal in FEC acc: 60 750(dr) – 108 000 (cr) – 108 000
27 000 (cr) – 33 750 (cr)
Bank R675 000 x 9,96 SR on expiry – 108 000
R675 000 x 10,12 FR obtained
Settlement of the foreign creditor and payment to financing house on expiry of FEC - Notice
that the FEC was a net liability to us – we made a commitment to pay A$6 831 000
(R675 000 x 10.12) using an FEC, but if we had simply ‘stuck with’ the spot rate, we would
have paid only A$6 723 000 (R675 000 x 9.96) (diff = 108 000)
31 December X6: year-end

Depreciation – equipment (E: P/L) (6 743 250 + 74 250 – 0)/10yrs x 10.5/ 12m 596 531
Equipment: accum. depr. (-A) 596 531
Depreciation of equipment – available for use from 15 Feb 20X6
31 December X7: year-end
Depreciation – equipment (E: P/L) (6 743 250 + 74 250 – 0)/10yrs x 1yr 681 750
Equipment: accum. depr (-A). 681 750
Depreciation of equipment

Part A continued …
a) continued …
NOT REQUIRED:
The balance in equity just before the basis adjustment on 15 February 20X6 (transaction date) can
be checked as follows:
The entire pre-transaction period is treated as a CFH (see explanation below):

• (10.01 – 10.12) x R675 000 = 74 250 (deferred loss, therefore a debit equity balance)
Explanation:
The FEC was entered into when a highly probable forecast transaction (HPFT) existed (1 Dec 20X5 –
1 Feb 20X6). This forecast transaction then became a firm commitment (FC) (1 Feb 20X6 –
15 Feb 20X6) before becoming a transaction that we could recognise (15 Feb 20X6). In other words, the
period before the transaction date consisted of a HPFT and a FC. The question we must then ask ourselves
is how to account for the hedge before transaction date:
• we always account for the hedge of a highly probable forecast transaction as a cash flow hedge
(CFH) and
• the entity chose to account for the hedge of the firm commitment as a cash flow hedge (CFH).
Spot: 10.10 10.19 10.00 9.99 9.96
FEC/ HPFT RD: YE FC TD SD
1 Dec X5 31 Dec X5 1 Feb X6 15 Feb X6 31 May X6
FEC: 10.12 10.21 10.05 10.01 N/A
Key:
FC: date on which FC was entered into, or if you see FC on the timeline, it refers to the date
on which FC was entered into
HPFT: highly probable forecast transaction, or if you see HPFT on the timeline, it refers to the
date on which the forecast transaction became highly probable
SR: spot rate
FR: forward rate
SD: settlement date

Part A continued …
b) Disclosure
KOALA LIMITED
20X7 20X6 20X5
A$ A$ A$
Revenue xxx xxx xxx
Other separately disclosable line items xxx xxx xxx
Foreign exchange loss: FEC See journals 0 (33 750) 0
Foreign exchange gain: foreign creditor See journals 0 20 250 0
Depreciation See journals (681 750) (596 531) 0
Profit for the period xxx xxx xxx
Other comprehensive income: See journals 0 (135 000) 60 750
• Items that may be reclassified to profit or loss: 0 0 0
• Items that may not be reclassified to profit or loss:
- Loss on cash flow hedge, net of tax (ignored)* 22 0 (135 000) 60 750
Total comprehensive income xxx xxx xxx
Calculations:
20X6 adjustment in OCI (see jnls) = 108 000 + 27 000 = 135 000
Comment:
Please note that the basis adjustment (which is processed in 20X7) of C74 250 is processed directly
through equity - without affecting OCI (and will thus appear only in the SOCIE and not in the SOCI).
KOALA LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X7 (Not required)
20X7 20X6 20X5
A$ A$ A$
Note 22 Other comprehensive income: cash flow hedge
Gain/ (loss) on cash flow hedge (OCI) See journals 0 (135 000) 60 750
Tax on gain on cash flow hedge (OCI) Ignored 0 0 (0)
0 (135 000) 60 750
Comment:
Only one year of comparatives is normally required, but the question stipulated that an extra year of
comparatives was required.

Part B
a) Journal explanation
The spot rate on 31 December 20X5 was A$10.19: R1 in Part A and in Part B it changes to
A$10,16: R1. The forward rate did not change.
The impact of this is that whereas:

• in Part A, the hedge was 100% effective, because, from the date the FEC had been entered
into (1 December 20X5) to reporting date (31 December 20X5):
- the forward rate moved by 9c (from A$10,12: R1 to A$10,21: R1), and
- the spot rate also moved by 9c (from A$10,10: R1 to A$10,19: R1)
• in Part B the hedge was not 100% effective, because, from the date the FEC had been
entered into (1 December 20X5) to reporting date (31 December 20X5):
- the forward rate moved by 9c (from A$10,12: R1 to A$10,21: R1), but
- the spot rate also moved by 9c (from A$10,10: R1 to A$10,16: R1).
As a result, we need to assess whether there is a portion of the hedge that is considered to be
ineffective since the ineffective portion is accounted for differently to the effective portion:
• it is only the gains or losses on the effective portion that may be recognised in other
comprehensive income;
• the gains or losses on any ineffective portion must be recognised in profit or loss.

Part B continued …
b) The journal for 31 December 20X5:
Debit Credit
31 December X5
FEC asset (A) R675 000 x A$10.21 FR at RD – 60 750
R675 000 x A$10.12 FEC rate obtained
Cash flow hedge reserve (OCI) Lower of gain of A$60 750 and movement 40 500
in hedged item of A$40 500 [R675 000 x
(Latest SR: A$10.16 – Previous SR:
A$10.10)]
Foreign exchange gain (I: P/L) Balancing : A$60 750 – A$40 500 20 250
CFH:HPFT: gain on FEC:
• partly recognised in OCI (effective portion = total gain, limited to
movement in hedged item) and
• partly recognised in P/L (ineffective portion, the overly-effective
portion = the remaining gain)
Explanation:
IFRSs only apply to material items and transactions. Since the gain or loss on the ineffective portion
of the hedging instrument on 31 December 20X5 is considered to be material in part (b), we must
apply the paragraphs in IFRS 9 regarding how to account for the effective and ineffective portions
of the gains or losses on the hedging instrument. See IFRS 9.6.5.11 (a) – (c)
When accounting for a cash flow hedge, we need to ensure that it is only the gains or losses on the
effective portion that are recognised in other comprehensive income. If we find that the hedge was
overly-effective (i.e. the hedging instrument contains an aspect of what is referred to as 'hedge
ineffectiveness'), the extent to which the hedge is overly-effective (ineffective) must be recognised
in profit or loss.
We start by calculating the gain or loss on the effective portion and recognise this in OCI and then if
our total gain or loss is greater than this, the excess gain or loss is regarded as relating to an ineffective
portion and is recognised in P/L.
Our first step is to calculate the cumulative gain (or loss) on the hedging instrument from hedge
inception: A$60 750
FEC Amt: R675 000 x (Latest FEC rates: A$10.21 – FEC rate obtained: A$10.12) = A$60 750
Our second step is to calculate the cumulative change in the fair value of the hedged item from hedge
inception: A$40 500
Future foreign cash outflow: R675 000 x (Spot rate now: A$10.16 – Spot rate then: A$10.10) = A$40 500
Our third step is to compare the two amounts (in absolute terms) and choose the lower of the two as
being the effective portion (recognised in OCI) with any excess being the ineffective portion
(recognised in P/L):
Effective portion: Lower of A$60 750 and A$40 500: thus, A$40 500
Ineffective portion: Total gain: A$60 750 – Gain on effective portion: A$40 500 = A$20 250
Thus, the gain on the effective portion (OCI) is A$40 500 (lower of the 2 amounts) and the gain on
the ineffective, or overly-effective, portion (P/L) is A$20 250.
Thus, in this situation, the hedging instrument offset more than just the movement in the hedged item
and thus only the effective portion may be recognised in other comprehensive income, and the rest
(the gain on the ineffective portion) will be recognised in profit or loss.

Solution 22.8
a) Calculation of the cost of the imported asset on acquisition date
R
Purchase price $320 000 × 12,6 (spot rate) 4 032 000
Cash flow hedge $320 000 × (13,30-12,90) (128 000)
Firm commitment asset $320 000 × (13,0-12,60) 128 000
Total cost of the asset 4 032 000
b) Journals
Debit Credit
28 February 20X8 (FEC date – uncommitted period)

No transactions are processed since a lapse of time is required for an FEC to gain in value.
1 July 20X8 (firm commitment date)
FEC Asset/ Liability (A) $320 000 x 13,30 FR on FC date – 128 000
Cash flow hedge reserve (OCI) $320 000 x 12,90 FR obtained 128 000
CFH: HPFT: gain on FEC on firm commitment date, recognised in OCI
1 September 20X8 (transaction date)

Foreign exchange loss (P/L: E) $320 000 x 12,80 FR on TD – 160 000
FEC Asset/ Liability (L) $320 000 x 13,30 FR on FC date (Prior) 160 000
FVH: FEC: loss on FEC on transaction date, recognised in P/L
Firm commitment asset (A) $320 000 × 12,60 SR on TD – 128 000

Foreign exchange gain (P/L: I) $320 000 x 13,00 SR on FC date (Prior) 128 000
FVH: FC: gain on f/commitment on transaction date, recognised in P/L
Plant: cost (A) $320 000 × 12,60 SR on TD 4 032 000

Recognising plant at spot rate on transaction date
Cash flow hedge reserve (OCI) Balance in this account 128 000
Plant: cost (A) 128 000
CFH: Basis adjustment - because the underlying transaction involves
a non-financial asset (plant), OCI is derecognised and recognised as
an adjustment to the cost of the plant on transaction date
Plant: cost (A) 128 000

Firm commitment asset (A) Balance in this account 128 000
FVH: FC: derecognising the firm commitment asset and recognising it
as an adjustment to the cost of the plant

Foreign exchange loss (P/L: E) $320 000 × 13,50 SR on RD – 288 000
Foreign creditor (L) $320 000 ×12,60 SR on TD (Prior SR) 288 000
Re-measurement foreign creditor at year end
FEC Asset/ Liability (A) $320 000 × 13,60 FR on RD – 256 000

FEC gain (P/L: I) $320 000 × 12,80 FR on TD (Prior FR) 256 000
FVH: gain on FEC, recognised in P/L
Depreciation – plant (P/L: E) (4 032 000 – 128 000 + 128 000 – 0) 134 400
Plant: accum. depreciation (-A) × 10% × 4/12 134 400
Depreciation for the year (from 2 September 20X8 when it first
became available for use)

b) continued ...
Debit Credit
31 January 20X9 (settlement date)
Foreign creditor (L) $320 000 × 13,40 SR on SD – 32 000
Foreign exchange gain (P/L) $320 000 × 13,50 SR on RD 32 000
Re-measurement foreign creditor on settlement date
Foreign creditor (L) $320 000 × 13,40 SR on SD 4 288 000

Bank 4 288 000
Settlement of foreign creditor
Foreign exchange loss (P/L) $320 000 × 13,45 FR on SD – 48 000

FEC Asset/ Liability (L) $320 000 x 13,6 FR on RD (Prior) 48 000
FVH: loss on FEC on settlement date, recognised in P/L
28 February 20X9 (FEC expires) (AFTER settlement date!)
FEC Asset/ Liability (A) $320 000 × 13,6 SR on expiry date – 48 000
Foreign exchange gain (P/L) $320 000 x 13,45 FR on SD (Prior) 48 000
FVH: loss on FEC on expiry date, recognised in P/L
Bank Balance in FEC asset: 224 000

128 000 – 160 000 + 256 000 – 48 000 + 48 000;
FEC asset (A) OR: 224 000
$320 000 × 13,6 SR on expiry date –
$320 000 × 12,90 FR obtained
Receipt from financing house on expiry of FEC
31 December 20X9
Depreciation – plant (P/L) (4 032 000 – 128 000 + 128 000 – 0) 403 200
× 10% × 1 year
Plant: acc. depreciation 403 200
Depreciation for the year

Solution 22.9
Part A: Forward contract expires and is replaced – hedge accounting continues
31 March 20X6 (FCC date – uncommitted period begins) Debit Credit

No entry since the lapse of time is required for the FCC to change value.
31 May 20X6 (transaction date)

FCC asset (A) Comment 1 $10 000 × 13.48 FR on TD – 500
Cash flow hedge reserve (OCI) $10 000 × 13.43 FR obtained 500
CFH: HPFT: gain on transaction date (on FCC #1), recognised in OCI
Inventory (A) $10 000 × 13.45 SR on TD 134 500

Foreign creditor (L) 134 500
Recognising inventory purchased on transaction date (we are told that 31 May
20X6 is the date the transaction is to be recognised)
Cash flow hedge reserve (Eq: bal) Balance in the CFH reserve account 500
Inventory (A) 500
CFH: Basis adjustment - because the underlying transaction involves a non-
financial asset (inventory), the cash flow hedge reserve is derecognised and
recognised as an adjustment to the cost of the inventory on transaction date
(this adjustment occurs directly through equity, i.e. it does not affect OCI)
30 June 20X6 (FCC expires and is replaced)

FCC asset (A) $10 000 × 13.60 SR on expiry – 1 200
Foreign exchange gain (I: P/L) $10 000 × 13.48 FR on TD (Prior FR) 1 200
FVH: gain on FCC #1 on its expiry, recognised in P/L
Bank $10 000 × 13.60 SR on expiry – 1 700

$10 000 × 13.43 FR obtained;
FCC asset (A) Balance in FCC asset: 500 + 1 200; 1 700
Receipt from financing house on expiry of FCC #1
31 August 20X6 (settlement date)

Foreign exchange loss (E: P/L) $10 000 × 13.70 SR on SD – 2 500
Foreign creditor (L) $10 000 × 13.45 SR on TD (Prior SR) 2 500
Restating foreign creditor on settlement date
FCC asset (#2) (A) $10 000 × 13.70 SR on SD – 800

Foreign exchange gain (I: P/L) $10 000 × 13.62 FR obtained 800
FVH: gain on FCC #2 on settlement date, recognised in P/L Comment 2
Foreign creditor (L) Bal in F/Creditor: 134 500 + 2 500 137 000
Bank $10 000 × 13.70 SR on SD 137 000
Bank $10 000 × 13.70 SR on expiry – 800

$10 000 × 13.62 FR obtained;
FCC asset (A) Balance in FCC asset: 800 800
Comments:
1. A forward cover contract (FCC) is just another name for a forward exchange contract (FEC).
2. When a FCC (or FEC) is replaced or rolled over, hedge accounting would cease if the replacement
or rollover was not within the entity’s documented hedging strategy. Since the only reason a 3-
month contract was signed was because a 5-month contract was not available, we conclude that the
replacement of the 3-month contract with a 2-month contract on expiry of the 3-month contract
was part of the hedging strategy. Thus, we continue to apply hedge accounting.

Part B: Forward contract expires and is replaced – hedge accounting is discontinued
The journals in Part B, using normal accounting principles, would be almost identical to the
journals presented in Part A, using hedge accounting. The only journal that differs slightly is
the journal showing the gain of R800 on 31 August 20X6 where the gain is no longer called a
‘foreign exchange gain’ but a ‘fair value gain’ instead. See the journals on the next page.
Explanation (not required):
The FCC expires on 30 June 20X6. Until this date, hedge accounting is applied (see the first 5
journals in Part A i.e. all journals from the first journal for R500 to the fifth journal for R1 700
will be the same).
The entity then entered into a second FCC on 30 June 20X6, but we are told that the hedging
requirements on this date are no longer met. This means that we may not apply hedge
accounting from this date.
IFRS 9 states that when a hedging instrument (e.g. forward cover contract) is sold, terminated,
exercised or expired that hedge accounting must cease prospectively (from that point onwards).
It also explains that a hedging instrument (e.g. FCC) that is rolled forward or replaced (as is the
case in this question) would be accounted for as an expiry or termination (i.e. unless the
replacement or rollover was part of the entity’s documented hedging objective), and thus hedge
accounting would need to cease. The information provided in Part B of the question states that
we are to assume that the hedging requirements cease to be met when the second FCC is entered
into, which means that this roll forward or replacement contract was obviously not part of the
entity’s documented hedging objective.
However, in this scenario, applying the normal accounting principles from 30 June 20X6
onwards would result in almost the same journals as in Part A (see the last 4 journals in
Part A that account for the relationship between the second FCC and the expected cash outflow
using the principles of hedge accounting) – though the disclosure may differ.
Using normal accounting principles:
• The foreign creditor, accounted for in terms of IAS 21, would still require restatement using
the spot rate on settlement date (see journal for R2 500) and would still be derecognised
when it was paid (see journal for R137 000).
• the FCC, accounted for in terms of IFRS 9 but as a financial instrument, would be accounted
for as a derivative and would thus be measured at fair value through profit or loss (FVPL)
and thus would need to be remeasured to fair value (FV) on settlement date, with the FV
gain recognised in P/L – the only difference is that this gain is now called a fair value gain
(not a forex gain); and the FCC asset or liability balance would still be derecognised when
settled (see journal for R800).
The journals using normal accounting principles are shown overleaf…

Part B continued…
Debit Credit
31 March 20X6 (FCC date – uncommitted period begins)
No entry since the lapse of time is required for the FCC to change value.
31 May 20X6 (transaction date)

FCC asset (A) $10 000 × 13.48 FR on TD – 500
Cash flow hedge reserve (I: OCI: Eq) $10 000 × 13.43 FR obtained 500
CFH: HPFT: gain on transaction date (FCC #1), recognised in OCI
Inventory (A) $10 000 × 13.45 SR on TD 134 500

Foreign creditor (L) 134 500
Recognising inventory purchased on transaction date (we are told that 31 May
20X6 is the transaction date).
Cash flow hedge reserve (Eq: bal) Balance in the CFH reserve account 500
Inventory (A) 500
CFH: Basis adjustment - because the underlying transaction involves a non-
financial asset (inventory), the cash flow hedge reserve is derecognised and
recognised as an adjustment to the cost of the inventory on transaction date
(this adjustment occurs directly through equity, i.e. it does not affect OCI)
30 June 20X6 (FCC expires, and is replaced)

FCC asset (A) $10 000 × 13.60 SR on expiry – 1 200
Foreign exchange gain (I: P/L) $10 000 × 13.48 FR on TD (Prior 1 200
FR)
FVH: gain on FCC #1 on its expiry, recognised in P/L
Bank $10 000 × 13.60 SR on expiry – 1 700

$10 000 × 13.43 FR obtained;
FCC asset (A) Balance in FCC asset: 500 + 1 200 1 700
31 August 20X6 (settlement date)

Foreign exchange loss (E: P/L) $10 000 × 13.70 SR on SD – 2 500
Foreign creditor (L) $10 000 × 13.45 SR on TD (Prior SR) 2 500
Restating foreign creditor on settlement date
FCC asset (#2) (A) $10 000 × 13.70 SR on SD – 800

Fair value gain (I: P/L) $10 000 × 13.62 FR obtained 800
Fair value gain on FCC #2 on settlement date, recognised in P/L
Foreign creditor (L) Bal in F/Creditor: 134 500 + 2 500 137 000
Bank $10 000 × 13.70 SR on SD 137 000
Bank $10 000 × 13.70 SR on expiry – 800
$10 000 × 13.62 FR obtained
FCC asset (A) Balance in FCC asset: 800 800
Comment: the journals above that differed from the journals under Part A have been highlighted in grey.

Solution 22.10
a) Journals
The following journals show the hedge of the firm commitment as a cash flow hedge.
Debit Credit
5 December 20X5: date FEC entered into (an uncommitted period)
No entries
31 December 20X5: reporting date: year-end
Cash flow hedge reserve (OCI) BWP4 200 000 x 1.12 FR on RD – 378 000
FEC asset/ liability (L) BWP4 200 000 x 1.21 FR obtained 378 000
CFH: HPFT: loss on FEC, recognised in OCI
31 January 20X6: firm commitment (uncommitted period ends –

committed period starts)
FEC asset/ liability (L to A) BWP4 200 000 x 1.50 FR on FC date – 1 596 000
Cash flow hedge reserve BWP4 200 000 x 1.12 FR on RD (Prior FR) 1 596 000
(OCI)
(Notice how the FEC started off as a liability in 20X5, but after this
journal in 20X6, it has become an asset)
31 March 20X6: transaction date (committed period ends)
Cash flow hedge reserve (OCI) BWP4 200 000 x 1.10 FR on TD – 1 680 000
FEC asset/ liability (A to L) BWP4 200 000 x 1.50 FR on FC date 1 680 000
(Prior FR)
CFH: FC: loss on FEC on transaction date, recognised in OCI
(Notice how the FEC started off as a liability in 20X5, but that after the
first CFH journal in 20X6, it became an asset and now, after the second
CFH journal in 20X6, it becomes a liability again)
Inventory (A) BWP4 200 000 x 0.99 SR on TD 4 158 000

Recognising inventory (LEDs) at spot rate on transaction date (which was
date of shipment because it was FOB)
Inventory (A) 378 000 dr – 1 596 000 cr + 1 680 000 dr 462 000
Cash flow hedge reserve (Eq) 462 000
CFH: Basis adjustment - because the underlying transaction involves a
non-financial asset (inventory), the cash flow reserve is derecognised and
recognised as an adjustment to the cost of the inventory on transaction
date
30 June 20X6: settlement date
Foreign exchange loss (E: P/L) BWP4 200 000 x 0.69 SR on SD – 1 722 000
FEC asset/ liability (L) BWP4 200 000 x 1.10 FR on TD (Prior FR) 1 722 000
Foreign creditor (L) BWP4 200 000 x 0.69 SR on SD – 1 260 000

Foreign exchange gain (I: P/L) BWP4 200 000 x 0.99 SR on TD (Prior SR) 1 260 000
Re-measurement of foreign creditor at spot rate on settlement date

a) continued …
Debit Credit
30 June 20X6: settlement date continued …
Foreign creditor (L) BWP4 200 000 x 0.69 SR on SD 2 898 000

Bank 2 898 000
FEC asset/ liability (L) Balance in FEC a/c: 378 000 - 1 596 000 + 2 184 000
Bank 1 680 000 + 1 722 000; OR 2 184 000
BWP4 200 000 x 0.69 SR on expiry –
BWP4 200 000 x 1.21 FR obtained
Settlement of the foreign creditor & Payment to the financing house on
expiry of the FEC
Notice that the FEC was a net liability to us because it effectively
committed us to paying R5 082 000 (BWP4 200 000 x 1.21), but if we had
simply stuck with the spot rate, we would have only paid R2 898 000
(BWP4 200 000 x 0.69), thus the FEC resulted in us paying an extra
R2 184 000
Cost of sales (E: P/L) (4 158 000 + 462 000) x (100% - 40%) 2 772 000
Sale of 60% of the inventory
Bank/ Accounts receivable (A) 2 772 000 x 130% 3 603 600

Revenue: sales (I: P/L) 3 603 600
Inventory sold at 30% mark-up on cost

b) Disclosure
AHAVA LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
20X6 20X5
Notes R R
.... xxx xxx
Profit for the period C A
Other comprehensive income From journals (84 000) (378 000)
20X6: (1 680 000 – 1 596 000)
Items that will be reclassified to profit or loss: 0 0
Items that will not be reclassified to profit or loss:
- Gain/ (loss) on cash flow hedge, net of tax (ignored) 32 (84 000) (378 000)
Total comprehensive income D B
AHAVA LIMITED
STATEMENT OF CHANGES IN EQUITY (EXTRACTS)
Retained OCI: Cash Total
earnings flow hedge R
R R
Total comprehensive income From SOCI A (378 000) B
Total comprehensive income From SOCI C (84 000) D
Basis adjustment From journals 462 000
AHAVA LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS)
17. Profit before tax 20X6 20X5

R R
Profit before tax is stated after taking into account the following
separately disclosable (income)/ expense items:
- Foreign exchange loss: FEC See journals 1 722 000 0
- Foreign exchange gain: creditor See journals (1 260 000) 0
32. Other comprehensive income: cash flow hedge 20X6 20X5

R R
Loss on cash flow hedge recognised in OCI See journals (84 000) (378 000)
Tax on gain/ loss on cash flow hedge (OCI) Ignored xxx xxx
(84 000) (378 000)

c) Journals
The following journals show the hedge of the firm commitment as a fair value hedge. Part (a) showed
the hedge of the firm commitment as a cash flow hedge. The journals shown below that differ from the
journals in part (a) have been highlighted to make it easier for you to compare the two methods of
accounting for the hedge of a firm commitment.
Debit Credit
5 December 20X5: Date FEC entered into
No entries
31 December 20X5: Reporting date (year-end)
Cash flow hedge reserve (OCI) BWP4 200 000 x 1.12 FR on RD – 378 000
FEC asset/ liability (L) BWP4 200 000 x 1.21 FR obtained 378 000
CFH: HPFT: loss on FEC on reporting date, recognised in OCI
31 January 20X6: Firm commitment
FEC asset/ liability (L to A) BWP4 200 000 x 1.50 FR on FC date – 1 596 000
Cash flow hedge reserve (OCI) BWP4 200 000 x 1.12 FR on RD (Prior FR) 1 596 000
Notice how the FEC started off as a liability in 20X5, but after this journal
in 20X6, it has become an asset: 1 596 000 – 378 000 = 1 218 000A
31 March 20X6: Transaction date (committed period ends)
Foreign exchange loss (E: P/L) BWP4 200 000 x 1.10 FR on TD – 1 680 000
FEC asset/ liability (A to L) BWP4 200 000 x 1.50 FR on FCD (Prior FR) 1 680 000
FVH: FC: FEC: loss on FEC on transaction date, recognised in P/L.
(Notice how the FEC started off as a liability in 20X5, but that after the
first CFH journal in 20X6, it became an asset and now, after the second
CFH journal in 20X6, it becomes a liability again).
Firm commitment asset (A) BWP4 200 000 x 0.99 SR on TD – 42 000

Foreign exchange gain (I: P/L) BWP4 200 000 x 1.00 SR on FCD (Prior SR) 42 000
FVH: FC: FC: gain on FC on transaction date, recognised in P/L
Inventory (A) BWP4 200 000 x 0.99 SR on TD 4 158 000

Recognising inventory (LEDs) at spot rate on transaction date (which was
date of shipment because it was FOB)
Inventory (A) 42 000

Firm commitment asset (A) 42 000
FVH: firm commitment asset derecognised and recognised as an
adjustment to the acquired asset (inventory)
Cash flow hedge reserve (Eq) 378 000 (dr) – 1 596 000 (cr) 1 218 000
CFH: Basis adjustment - because the underlying transaction involves a
non-financial asset (inventory), the cash flow hedge reserve is
derecognised and recognised as an adjustment to the cost of the inventory
on transaction date
30 June 20X6: Settlement date

Foreign exchange loss (E: P/L) BWP4 200 000 x 0.69 SR on SD – 1 722 000
FEC asset/ liability (L) BWP4 200 000 x 1.10 FR on TD 1 722 000

c) continued …
Debit Credit
30 June 20X6: Settlement date continued …
Foreign creditor (L) BWP4 200 000 x 0.69 SR on SD – 1 260 000

Foreign exchange gain (I: P/L) BWP4 200 000 x 0.99 SR on TD (Prior SR) 1 260 000
Re-measurement of creditor using spot rate on settlement date
Foreign creditor (L) BWP4 200 000 x 0.69 SR on SD 2 898 000

Bank 2 898 000
FEC asset/ liability (L) Bal in FEC L: 378 000 cr – 1 596 000 dr + 2 184 000
Bank 1 680 000 cr + 1 722 000 cr; OR 2 184 000
BWP4 200 000 x 0.69 SR on expiry –
BWP4 200 000 x 1.21 FR obtained
Settlement of the foreign creditor and payment to the financing house on
expiry of the FEC
31 December 20X6: Reporting date (year-end)
Cost of sales (E: P/L) (4 158 000 + 42 000 – 1 218 000) x (100 -40%) 1 789 200
Sale of 60% of the inventory
Bank/ accounts receivable (A) 1 789 200 x 130% 2 325 960

Revenue: sales (I: P/L) 2 325 960
Inventory sold at 30% mark up on cost
Comment: the journals above that differed from the journals under part (a) have been highlighted in grey.

22 Hedging s22 - FINAL

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22 Hedging s22 - FINAL

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Solutions to GAAP: Graded Questions Hedge accounting

Explanation: Only statements 3 and 4 are correct.

Explanation: The statement is false.

© Service & Kolitz, 2022-2023 Chapter 22: Page 1

Solution 22.1 continued …

© Service & Kolitz, 2022-2023 Chapter 22: Page 2

1 October 20X4: transaction date

31 December 20X4: reporting

Depreciation (P/L) (¥630 000 – 0)/ 10 x 1/12 5 250

1 March 20X5: settlement date

Foreign creditor RUB360 000 x 1,90 SR on SD 684 000

31 December 20X5: year-end

Spot: 1,75 1,85 1,90

© Service & Kolitz, 2022-2023 Chapter 22: Page 3

Solution 22.2 continued …

Part B: with an FEC YEN (¥)

31 December 20X4: year-end

FEC asset RUB360 000 x 2,10 FR on RD – 108 000

Depreciation (P/L) (¥630 000 – 0)/ 10 x 1/12 5 250

1 March 20X5: settlement date

Foreign exchange loss: FEC (P/L) RUB360 000 x 1,90 SR on SD – 72 000

Foreign creditor RUB360 000 x 1,90 SR on SD 684 000

31 December 20X5: year-end

Spot: 1,75 1,85 1,90

FEC: 1,80 2,10 N/A

© Service & Kolitz, 2022-2023 Chapter 22: Page 4

a) Journals Debit/ Credit

© Service & Kolitz, 2022-2023 Chapter 22: Page 5

Solution 22.3 continued …

Total comprehensive income 960 600

© Service & Kolitz, 2022-2023 Chapter 22: Page 6

Solution 22.3 continued …

A timeline that you may find useful:

FEC/ HPFT RD: Y/E TD SD

FEC: 14.06 14.22 14.24 N/A

© Service & Kolitz, 2022-2023 Chapter 22: Page 7

a) Hedge of the firm commitment is a cash flow hedge

Calculations Debit Credit

28 February 20X6 (reporting date: year-end)

31 March 20X6 (transaction date)

Equipment: cost (A) €300 000 × 7.40 SR on TD 2 220 000

30 April 20X6 (installation date)

30 June 20X6 (expiry of FEC and settlement of foreign creditor)

Foreign exchange loss (P/L) €300 000 × 7.60 SR on SD – 60 000

Foreign creditor (L) €300 000 × 7.60 SR on SD 2 280 000

28 February 20X7 (year-end)

© Service & Kolitz, 2022-2023 Chapter 22: Page 8

Solution 22.4 continued …

A timeline that you may find useful:

FEC/ FC RD: Y/E TD SD

FEC 7.45 7.22 7.43 7.60

© Service & Kolitz, 2022-2023 Chapter 22: Page 9

Solution 22.4 continued …

b) Hedge of the firm commitment is a fair value hedge

30 September 20X5 Calculations Debit Credit

Firm commitment asset/ liability €300 000 × 7.20 SR on RD – 90 000

31 March 20X6 (transaction date)

Foreign exchange loss (E: P/L) €300 000 × 7.40 SR on TD – 60 000