Hedge accounting - draft alert

In order to be awarded CPD units you must answer the following five random questions correctly. If you fail the test, please re-read the article before attempting the questions again.

  1. The International Accounting Standards Board (IASB) is developing a new standard for the financial reporting of financial instruments that is principle-based and less complex. Which of the following is not one of the main phases of the IASB`s project to replace IAS 39?

  2. The current rules on hedge accounting in IAS 39 have frustrated many preparers. As a result, the IASB has made some significant changes to certain aspects of the proposals contained in the Exposure Draft that was issued in December 2010. Which of the following requirements is changed in the Draft?

  3. Under the Draft, more judgement is needed to assess the effectiveness of the hedging relationship. A hedging relationship would need to be effective at inception and on an ongoing basis, and would be subject to a qualitative or quantitative, forward-looking effectiveness assessment. Which of the following is not a specific requirement of the Draft?

  4. There are different trading markets for oil. These include the prices of West Texas Intermediate (WTI) crude oil and Brent crude. The former is a nexus for the delivery of American and Canadian crudes and the latter reflects the price of North Sea oil. Is it possible to hedge a Brent crude exposure with a WTI derivative?

  5. There are two scenarios set out in the Draft, one in which an inflation risk component is eligible for hedge accounting and another in which it is not. What is the general rule regarding inflation risk and the hedging thereof?

  6. The Draft also makes the hedging of certain groups of items more flexible. It consists of items that are eligible hedged items and the items in the group are managed together on a group basis for risk management purposes

  7. Entities commonly group similar risk exposures and hedge only the net position, which could be the net of forecast purchases and sales of foreign currency. Under IAS 39, a net position cannot be designated as the hedged item. What does the Draft say as regards hedging a net position?

  8. An entity is not allowed to voluntarily terminate a hedging relationship that continues to meet its risk management objective and all other qualifying criteria. However, the Draft has retained the requirement for rebalancing to be undertaken. Under what circumstances will rebalancing be undertaken?

  9. The proposals on discontinuation have not changed but further guidance. Is given on how to distinguish between an entity`s risk management strategy and its risk management objective. What is the key difference between an entity`s risk management strategy and its risk management objective?

  10. Some industries, such as banking and insurance, may see the proposals as of less importance than the IASB`s forthcoming macro-hedging paper, but sectors with substantial commodity related risk will welcome the opportunities provided. Which of the following type of business entity is likely to benefit more from the proposals?