Hedge accounting

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 IASB has recently released an Exposure Draft (ED) ‘Hedge Accounting’ with proposals to substantially change hedge accounting under IFRS. Which of the following was not a criticism of IAS 39’s hedge accounting rules?

  2. A company wishes to hedge its exposure to movements in the price of petrol by entering into a forward contract for crude oil. Can the entity use the hedge accounting rules currently set out under IAS 39?

  3. Designating groups of hedged items is difficult under the current rules because several criteria need to be satisfied. Can hedge accounting be used for the hedge of the equities that comprise a stock exchange index using an index future?

  4. IAS 39 has been criticised for its onerous requirements to perform effectiveness tests because of insufficient guidance on how to quantify hedge effectiveness. Why can hedge accounting not be dispensed with?

  5. The ED proposes requirements designed to enable companies to better reflect their risk management activities in their financial statements, and, in turn, help investors to understand the effect of those activities on future cash flows. What basis does the ED use to account for hedges of transactions?

  6. The exposure draft (ED) proposes relaxing the requirements for hedge effectiveness and consequently the eligibility for hedge accounting. What are the rules relating to hedge effectiveness which are set out in the ED?

  7. How is effectiveness testing conducted under the ED?

  8. How has the ED changed the presentation of fair value hedge accounting?

  9. How does the ED attempt to reduce the volatility relating to the time value of purchased options?

  10. Which of the following issues are not dealt with by the ED?