Hedging

Accounting treatment of call or put options

* The accounting treatment of call or put options prima facie depends upon the intention with which the call or put options are purchased – viz., hedging or speculation (non-hedging)

* If the position is taken as a hedge against some other position, then the accounting standard for hedge accounting will be applicable and there are certain conditions that are to be fulfilled for the same

Coverage of Accounting Standards

* Under US GAAP, Accounting Standard FAS 133 prescribes standardized accounting and reporting requirements for all derivative instruments for hedging activities

* Under IFRS, IAS 39, IAS 32 and IFRS 7 covers the accounting and reporting requirements for all financial instruments including derivative instrument and treatment for hedge accounting

* Under Indian Accounting Standards AS 30, AS 31 and AS 32 covers the accounting and reporting requirements for all financial instruments including derivative instrument and treatment for hedge accounting

Lesson 2 - Hedge Accounting

Hedge Accounting

Hedge Accounting |

Topic | US GAAP | IFRS |

Hedge Accounting - documentation | Requires proper documentation of the entity’s risk management objectives and how hedge effectiveness will be assessed both prospectively and retrospectively | Same as US GAAP |

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Hedge Accounting - effectiveness | Hedge instruments should be highly effective in offsetting the exposure of the hedged item to changes in the fair value or cash flows, and the effectiveness of the hedge is measured on a continuing basis | Same as US GAAP |

Short-cut method | Allows a ‘short-cut’ method that assumes perfect effectiveness for certain hedging relationships involving interest-rate swaps, assuming that other stringent conditions are met | No short-cut method is allowed under IFRS |

Written options as hedge | Written options will not qualify for hedge accounting in most cases | A written option cannot be...