Hedges

Hedging Relationships

The CICA Handbook Section 3865, Hedges, retains most of AcG-13, Hedging Relationships such as:

• Formal documentation, designation of specific hedging relationship components, and assessment of effectiveness are pre-requisites for application of hedge accounting
• Section 3865 includes:
  • Limitations on use of cash instruments in hedging relationships
  • New accounting for hedging relationships - fair value and cash flow hedges
  • New concept of measurement of ineffectiveness from a hedging relationship

Section 3865 is slightly different from International standards (IAS39) and US standards (FAS133)

Definition of a Hedging Relationship

Classification of a Hedging Relationship

Summary of Conditions of a Hedging Relationship

The documentation, designation and effectiveness requirements must be completed before hedge accounting is permitted for any hedging strategy.  The documentation requirements include:

• Overall risk management policy and strategy
• Specific description of each type of hedging relationship including type of derivative, hedged item, specific risk being hedged, term of hedging relationship, etc.
• Identification of frequency and method of assessing and measuring effectiveness
• Method of accounting for each hedging strategy

Transition

The AcG-13 will be replaced by Section 3865 on date of adoption.  The Section 3865 must be applied prospectively on the adoption date.  Hedged items in fair value hedging relationships will require an adjustment to carrying value for the risk being hedged.  The deferred balances from cash flow hedging relationships will require reclassification to either other comprehensive income or opening retained earnings.

Other Considerations

• Has your company updated your accounting for hedging relationships?
• Has each embedded derivative been analyzed and possibly considered as part of a hedging relationship?
• Does your company understand the impact that measuring ineffectiveness has on net income? Have the potential ineffectiveness amounts been calculated?
• Is there personnel to ensure the conditions of hedging relationships are met?
• Has your company inventoried existing hedging relationships to identify whether they are fair value, cash flow or a hedge of net investment?
• Does your company understand how to fair value hedged risks?
• Does your company have the capability or expertise to value the hedged item in fair value hedging relationships?
• How will management communicate the nature of ineffectiveness?