In short
To use hedge accounting, a hedge must be expected to be highly effective, meaning changes in the hedging instrument's value offset about 80% to 125% of changes in the hedged item, both at inception and on an ongoing basis.
Key takeaways
- An initial quantitative test is required unless a method such as critical terms match or the shortcut method applies; later tests can be qualitative.
- The whole change in the hedging instrument is presented in the same income statement line as the hedged item.
- Ineffectiveness in a cash flow hedge isn't measured separately.
Where it's tested
BAR: Derivatives & Hedge Accounting — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company with variable-rate debt enters into an interest rate swap to pay fixed and receive variable, properly designated and documented as a hedge. Where are changes in the swap's fair value reported?