Hedge Accounting, Taxation and Legal Frameworks

Introduction

Derivative instruments can reduce exposure to foreign exchange, interest-rate, commodity-price and credit risks, but their accounting, tax and legal consequences are often as significant as their economic effects. A hedge that is economically sensible may produce volatile reported earnings if it does not qualify for hedge accounting. Similarly, a transaction that is effective before tax may create taxable income, deductible losses, withholding obligations or deferred-tax balances in several jurisdictions. Legal documentation determines whether the parties’ rights are enforceable, particularly when a counterparty defaults or becomes insolvent.

This chapter examines the integrated framework required for international businesses using derivatives. It focuses on IFRS 9 hedge accounting, including designation, documentation, effectiveness and presentation; taxation of hedging transactions; legal and regulatory infrastructure; ISDA documentation; cross-border reporting; and governance. The central principle is that economic risk management, financial reporting, taxation and legal enforceability must be designed together rather than treated as separate compliance activities.

Learning Objectives

By the end of this chapter, students should be able to:

1. Explain the purpose and scope of hedge accounting under IFRS 9.
2. Distinguish fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation.
3. Prepare a defensible hedge designation and documentation package.
4. Analyse IFRS 9 effectiveness, ineffectiveness and presentation requirements.
5. Evaluate current-tax and deferred-tax consequences of derivative hedging.
6. Explain the legal function of ISDA Master Agreements, collateral arrangements and close-out netting.
7. Assess major cross-border regulatory and reporting obligations.
8. Recommend governance practices for multinational treasury and risk-management functions.

1. The Integrated Architecture of a Hedging Programme

A hedging programme has four connected layers:

The accounting designation cannot transform an ineffective economic hedge into an effective one. Nor does accounting treatment determine tax treatment. A derivative may be designated as a cash flow hedge for IFRS purposes while local tax law recognises its gains and losses immediately at fair value. The resulting timing difference may create deferred tax.

A useful governance principle is substance before designation: the entity should first identify the risk, determine an appropriate instrument and establish a risk-management objective. Only then should it consider whether the accounting requirements can be satisfied.

2. IFRS 9 Hedge Accounting: Conceptual Foundations

IFRS 9 permits hedge accounting when it reflects an entity’s risk-management activities in the financial statements. It is not a general election to defer losses or smooth profit. The rules are intended to align the accounting effects of a hedging instrument with the accounting effects of the hedged item.

2.1 Eligible components

A hedging relationship normally contains:

• a hedging instrument, usually a derivative, although a non-derivative financial instrument may qualify in limited circumstances;
• a hedged item, exposure or group of items;
• an identifiable hedged risk; and
• a formal designation and documentation made at the inception of the relationship.

The hedged item may be a recognised asset or liability, an unrecognised firm commitment, a highly probable forecast transaction, a net investment in a foreign operation, or a component of one of these where the component is separately identifiable and reliably measurable.

A risk component can be designated only when it is separately identifiable and reliably measurable within the relevant context. For example, a benchmark interest-rate component of a floating-rate exposure may qualify if it can be measured reliably. A commodity-price component may qualify where the pricing formula identifies the component and market data support valuation.

2.2 Types of hedge accounting

#### Fair value hedge

A fair value hedge addresses exposure to changes in the fair value of a recognised asset or liability, or an identified portion of it, attributable to a particular risk. The gain or loss on the hedging instrument is recognised in profit or loss. The hedged item is adjusted for the change in fair value attributable to the hedged risk, and that adjustment is also recognised in profit or loss.

For an item measured at amortised cost, the hedge-related adjustment is subsequently amortised through profit or loss using a recalculated effective interest rate. If the hedged item is an equity instrument for which the entity has elected presentation of fair-value changes in other comprehensive income, the hedge adjustment remains in other comprehensive income rather than being routed through profit or loss in the same way as a debt item.

#### Cash flow hedge

A cash flow hedge addresses variability in cash flows that could affect profit or loss. Examples include future foreign-currency purchases, forecast interest payments and highly probable forecast sales.

The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and accumulated in the cash flow hedge reserve. The ineffective portion is recognised immediately in profit or loss. When the hedged forecast transaction occurs, the accumulated amount is treated according to the nature of the transaction:

• if it results in recognition of a non-financial asset or liability, the amount is removed from the reserve and included in the initial cost or other carrying amount of that asset or liability (basis adjustment);
• if it affects profit or loss, the amount is reclassified to profit or loss in the same period or periods in which the hedged cash flows affect profit or loss; and
• if the forecast transaction is no longer expected to occur, the accumulated amount is generally reclassified immediately to profit or loss, subject to the specific IFRS 9 requirements.

#### Hedge of a net investment

A hedge of a net investment in a foreign operation addresses foreign-exchange risk arising from the entity’s interest in that operation. The effective portion is recognised in other comprehensive income and accumulated in the foreign-currency translation reserve. It is reclassified to profit or loss on disposal or partial disposal of the foreign operation when the relevant accounting requirements are met.

2.3 The IFRS 9 qualifying criteria

At the inception of the hedge relationship, the entity must formally designate and document:

1. the hedging instrument;
2. the hedged item;
3. the nature of the risk being hedged;
4. the entity’s risk-management objective and strategy; and
5. how it will assess whether the relationship meets the hedge-effectiveness requirements.

IFRS 9 requires an economic relationship between the hedged item and hedging instrument. Credit risk must not dominate the value changes arising from that economic relationship. The designated hedge ratio must reflect the ratio actually used in risk management, unless that ratio would create an accounting outcome inconsistent with the purpose of hedge accounting.

Unlike older rules, IFRS 9 does not impose a universal bright-line 80–125 percent effectiveness test. Effectiveness is assessed prospectively and, where relevant, retrospectively using methods appropriate to the risk and relationship. The absence of a bright-line test does not remove the need for disciplined measurement.

3. Documentation and Effectiveness Assessment

Documentation should be prepared at or before designation, not reconstructed after a loss occurs. A robust file identifies the underlying exposure, the instrument, the risk, the hedge ratio, valuation sources, forecast probability and accounting treatment.

3.1 Prospective assessment

Prospective assessment asks whether the relationship is expected to meet the economic relationship and other qualifying conditions. Methods may include critical-terms comparison, regression analysis, scenario analysis, dollar-offset analysis or valuation modelling. The selected method must be proportionate to the complexity and materiality of the hedge.

A critical-terms comparison may be appropriate where the notional amount, currency, maturity, reset dates and underlying risk of the instrument closely match the exposure. It becomes less persuasive where forecast timing, credit spreads, optionality or basis differences create material mismatch.

3.2 Retrospective analysis and ineffectiveness

Retrospective analysis explains the actual result and identifies ineffectiveness. Sources include:

• timing differences between the derivative and exposure;
• differences in reference rates or currencies;
• forecast-volume changes;
• excluded components such as forward points or time value of options;
• counterparty and own-credit effects; and
• changes in the probability of the forecast transaction.

The accounting entry must not conceal ineffectiveness. If a derivative gains CU 1.2 million while the hedged risk produces a CU 1.0 million offsetting loss, the CU 0.2 million difference is not automatically deferred. Its treatment depends on the type of hedge, the designated component and the applicable IFRS 9 requirements.

3.3 A simple illustrative measurement

Assume a company designates a forward contract to hedge a forecast foreign-currency purchase. At the reporting date, the derivative has a fair-value gain of CU 120,000 and the change in the hedged cash-flow exposure attributable to the designated risk is a CU 115,000 loss. For a cash flow hedge, a simplified comparison indicates:

• effective offset: CU 115,000, recognised in OCI, subject to the applicable reserve and subsequent treatment;
• apparent ineffectiveness: CU 5,000, recognised in profit or loss.

This illustration assumes that the measured changes are comparable, that no excluded component requires separate treatment, and that the hedge relationship continues to qualify. It is not a substitute for a full valuation or IFRS 9 assessment.

A ratio can be used as an analytical tool, but it is not an IFRS 9 universal test:

The ratio is dimensionless because both numerator and denominator are measured in the same currency. In the illustration, it is 115,000 ÷ 120,000 = 95.83%. The result may assist analysis, but the conclusion must consider the economic relationship, credit risk, hedge ratio and designated method rather than applying a mechanical threshold.

4. Presentation, Discontinuation and Disclosure

Derivative instruments are generally recognised at fair value. Positive fair values are assets and negative fair values are liabilities, subject to applicable presentation and offsetting rules. IFRS 7 requires disclosures about the nature and extent of risks, risk-management activities, hedge accounting effects and the effect of hedging on financial statements. IFRS 13 governs fair-value measurement and disclosure, including valuation techniques and significant unobservable inputs.

Hedge accounting is discontinued prospectively when the qualifying criteria are no longer met, when the risk-management objective changes, or when the hedging relationship is formally terminated in circumstances requiring discontinuation. Voluntary discontinuation is not permitted merely because the hedge has become profitable or temporarily inconvenient, if the risk-management objective and qualifying conditions remain unchanged.

For a cash flow hedge, accumulated OCI is not automatically transferred to profit or loss at discontinuation. If the future cash flows are still expected to occur, the reserve generally remains until those cash flows affect accounting. If they are no longer expected to occur, the relevant amount is reclassified to profit or loss, subject to the standard’s requirements.

Disclosure should enable users to understand:

• the entity’s risk-management strategy;
• how hedging activities may affect the amount, timing and uncertainty of future cash flows;
• the effect of hedge accounting on the statement of financial position, profit or loss and OCI; and
• sources of hedge ineffectiveness and concentrations of risk.

5. Taxation of Hedging Transactions

Tax treatment is jurisdiction-specific. There is no universal rule that a derivative follows the accounting treatment of its hedged item. Tax analysis should therefore be completed separately for each relevant jurisdiction and entity.

5.1 Current tax

A tax authority may recognise derivative gains and losses:

• on settlement;
• on realisation of cash flows;
• on accrual or mark-to-market principles;
• under a statutory financial-accounting conformity rule; or
• under special rules for financial instruments, foreign exchange or hedging transactions.

A cash flow hedge reserve in OCI does not necessarily defer current tax. If local law taxes annual fair-value movements while IFRS defers the effective accounting amount in OCI, taxable profit may differ from accounting profit. Conversely, a tax deduction may arise only when the derivative settles.

Other relevant issues include withholding taxes on interest or embedded returns, deductibility limits, anti-hybrid rules, thin-capitalisation restrictions, transfer pricing, controlled-foreign-company rules, permanent-establishment risk and restrictions on losses. Cross-border payments should be reviewed for treaty relief and beneficial-ownership requirements.

5.2 Deferred tax under IAS 12

Temporary differences arise when the tax base of an asset or liability differs from its carrying amount. For example, a derivative recognised at fair value for IFRS may have a tax base of nil until settlement. Deferred tax is measured using the tax rates expected to apply when the difference reverses, based on enacted or substantively enacted law.

The presentation of deferred tax generally follows the underlying transaction. If the underlying item is recognised in OCI, the related deferred tax is also generally recognised in OCI; if it is recognised in profit or loss, related tax is generally recognised in profit or loss. This principle prevents tax expense from being presented in a different performance category from the transaction that generated it.

A simplified deferred-tax calculation is:

Assume a deductible temporary difference of CU 120,000 and an enacted tax rate of 25%. The potential deferred-tax asset is 120,000 × 25% = CU 30,000, subject to recognition criteria, including the availability of probable future taxable profits. The sign and recognition depend on whether the difference is deductible or taxable and whether recovery is probable.

5.3 Tax governance

Treasury, tax and accounting teams should agree on a transaction inventory before execution. The inventory should identify the legal entity, counterparty, instrument, currencies, settlement location, tax residence, withholding exposure, accounting designation and expected reversal pattern. Tax opinions should be refreshed when legislation, accounting designation or the commercial purpose changes.

6. Legal Frameworks and ISDA Documentation

The enforceability of a derivative depends on contract law, capacity, authority, insolvency law, netting rules, collateral law and regulatory requirements. A trade confirmation records economic terms, but the broader contractual framework usually comes from an ISDA Master Agreement and related documents.

6.1 ISDA Master Agreement

The ISDA Master Agreement establishes standard provisions governing transactions between counterparties. Important matters include:

• representations and undertakings;
• payment and delivery obligations;
• events of default;
• termination events;
• early termination and close-out calculation;
• tax provisions;
• governing law and jurisdiction;
• notices and documentation requirements; and
• conditions precedent.

The Schedule modifies elections and negotiated provisions. Confirmations specify transaction-level terms such as notional amount, rate, maturity, business-day conventions, settlement dates and calculation methodology. A Credit Support Annex or equivalent collateral document addresses margin, eligible collateral, haircuts, thresholds, independent amounts, valuation disputes and transfer mechanics.

6.2 Close-out netting and collateral

Close-out netting allows multiple transactions to be terminated and valued as a single net amount after a default or termination event, subject to applicable law. It reduces gross exposure but is not automatically enforceable in every jurisdiction. Legal opinions commonly assess the effectiveness of netting against insolvency, branches, government entities and different types of collateral.

Collateral reduces current exposure but introduces liquidity, valuation, concentration, wrong-way-risk and operational risks. A collateral call can create a cash requirement precisely when market conditions are most adverse. Treasury policies should therefore model both derivative valuation and collateral liquidity.

6.3 Contractual risks

Particular attention should be paid to:

• benchmark-replacement language following the transition from LIBOR to risk-free reference rates;
• fallback rates and adjustment spreads;
• currency and settlement definitions;
• disruption events and force majeure;
• material adverse-change and additional-termination-event clauses;
• sanctions and anti-money-laundering representations;
• data, confidentiality and electronic confirmation procedures; and
• authority and corporate-benefit approvals.

A commercially attractive derivative can be legally unsuitable if the entity lacks authority, the transaction exceeds delegated limits or the governing law does not support the expected remedy.

7. Regulation and Cross-Border Reporting

Derivative regulation is jurisdictional and product-sensitive. A multinational may be subject simultaneously to home-country rules, host-country rules, counterparty obligations and rules based on the location of a trading venue or clearing service.

Major regulatory themes include:

• central clearing for specified standardised over-the-counter derivatives;
• margin requirements for uncleared derivatives;
• trade reporting to a repository;
• execution, transparency and record-retention requirements;
• registration or licensing of dealers and trading venues;
• position limits and reporting for commodities; and
• prudential, conduct and anti-market-abuse rules.

Examples include the European Market Infrastructure Regulation, the United States Dodd–Frank framework, the UK post-EU regulatory regime and comparable regimes in major Asian financial centres. The exact application depends on the entity’s status, product, notional exposure, venue, counterparty and jurisdiction. Regulations change frequently; organisations should rely on current legal advice and regulator publications rather than static checklists.

Trade reporting requires accurate legal-entity identifiers, unique transaction identifiers, product classifications, valuations, collateral information and lifecycle events. Data failures can result from inconsistent identifiers, manual amendments, time-zone errors, duplicate submissions and poor reconciliation between front, middle and back offices.

8. Governance, Controls and Technology

An effective hedging programme requires segregation of duties. Front-office staff execute transactions; risk functions measure exposure and limits; operations confirm and settle trades; accounting determines designation and presentation; tax evaluates jurisdictional consequences; and legal teams review enforceability.

A minimum control framework should include:

1. board-approved risk appetite and permitted instruments;
2. documented delegation of authority;
3. independent valuation or valuation verification;
4. daily exposure, limit and collateral monitoring;
5. confirmation and reconciliation controls;
6. hedge documentation completed at inception;
7. model validation for complex derivatives;
8. periodic effectiveness testing;
9. legal-opinion and tax-review registers; and
10. tested business-continuity and default-management procedures.

Technology can integrate treasury-management systems, enterprise-resource-planning systems, valuation engines, tax data and regulatory reporting platforms. Artificial intelligence may assist anomaly detection, document classification and forecast analysis, but it should not independently determine hedge designation or legal interpretation. Explainability, data lineage, human approval and model governance remain essential.

9. Illustrative Case: Meridian Components Group

Background

Meridian Components Group, a fictional multinational manufacturer, expects to purchase USD 20 million of electronic components in six months. Its functional currency is the euro. The purchase price is commercially fixed in US dollars, exposing Meridian to an increase in the euro cost if the US dollar strengthens. Meridian enters a six-month forward contract with a bank and intends to designate it as a cash flow hedge of the forecast purchase.

Problem

The treasury team wants to defer effective derivative gains and losses until the inventory is recognised, but the tax department warns that the jurisdiction taxes derivative fair-value movements annually. The legal department also identifies that the bank’s collateral terms permit daily variation margin and that the group has not confirmed the enforceability of close-out netting in one host jurisdiction.

Analysis

The forecast purchase is highly probable and the currency risk is separately identifiable. Meridian prepares documentation specifying the USD notional, forecast purchase date, EUR/USD risk, forward contract, hedge ratio and effectiveness method. The accounting team concludes that the relationship qualifies as a cash flow hedge if the IFRS 9 conditions continue to be met.

At year-end, the forward has a CU 900,000 gain, while the change in the designated hedged cash-flow exposure is a CU 870,000 offsetting loss. Subject to full valuation procedures, CU 870,000 is accumulated in OCI and CU 30,000 is recognised in profit or loss as ineffectiveness. When the inventory is recognised, the effective reserve is removed from OCI and included in the inventory’s initial carrying amount under the basis-adjustment requirements.

For tax, local law includes the CU 900,000 derivative gain in taxable income before the inventory purchase. This creates a current-tax consequence before the corresponding inventory cost is recognised for accounting. Meridian must assess the related temporary difference and recognise deferred tax where IAS 12 criteria are met. The tax result cannot be inferred solely from the OCI treatment.

The legal review confirms that the ISDA Master Agreement contains a governing-law clause and close-out provisions, but a local legal opinion is required before relying on netting against an insolvent host-country entity. Treasury also models the possibility that daily collateral calls will require euro liquidity even while the hedge is economically profitable.

Approach and outcome

Meridian implements a three-line approval process. Treasury documents the economic hedge; accounting approves the IFRS 9 designation; tax and legal teams approve the jurisdictional analysis. The group adds collateral forecasts to its liquidity dashboard, reconciles trade reports with bank records and updates the ISDA fallback language for the relevant reference rate.

The hedge reduces currency uncertainty, but it does not eliminate accounting, tax, liquidity or legal risk. Meridian’s outcome is improved because those risks were identified at inception rather than after settlement.

Learning points

• A forecast transaction must be highly probable and precisely documented.
• OCI treatment does not determine tax timing.
• Hedge ineffectiveness must be measured and reported.
• Collateral can create liquidity risk even when the hedge is successful.
• Netting assumptions require jurisdiction-specific legal support.

10. Limitations and Contemporary Issues

Hedge accounting can increase operational complexity. Forecast transactions may be delayed or cancelled, creating reclassification consequences. Valuation models may rely on observable inputs for some instruments and significant assumptions for others. Basis risk can remain even when notional amounts match. Accounting results may also differ from internal risk metrics because the two systems define exposures differently.

Climate transition, supply-chain disruption, sanctions, geopolitical conflict and rapidly changing benchmark rules create new hedge-designation challenges. A long-term power-purchase agreement, for example, may involve volume uncertainty and physical-settlement questions that complicate both accounting and legal analysis. Digital assets and tokenised contracts raise additional questions about classification, custody, valuation and regulatory perimeter.

Best practice is therefore iterative: identify the exposure, test the economic relationship, review the contract, assess tax and regulatory consequences, document the accounting and monitor the relationship throughout its life.

Chapter Summary

Hedge accounting under IFRS 9 aligns financial reporting with documented risk-management activities but does not eliminate the need for economic effectiveness, valuation discipline or governance. Fair value hedges recognise changes in the hedging instrument and hedged item in profit or loss; cash flow hedges generally place the effective portion in OCI until the hedged cash flows affect accounting; and net-investment hedges use OCI until disposal-related reclassification.

Designation must identify the instrument, item, risk, objective, hedge ratio and effectiveness method at inception. IFRS 9 does not use a universal 80–125 percent threshold, but it requires a genuine economic relationship and appropriate assessment. Tax law may recognise derivative results at different times or in different jurisdictions, creating current-tax and deferred-tax consequences. ISDA agreements, confirmations, collateral documents, close-out netting and legal opinions establish the contractual foundation of OTC derivatives. Regulatory duties include clearing, margin, reporting, transparency and record retention. Effective international hedging therefore requires integrated cooperation among treasury, accounting, tax, legal, risk and technology functions.

Key Terms

Hedge accounting: Accounting treatment that aligns gains or losses on a hedging instrument with the hedged exposure.

Hedging instrument: A designated financial instrument whose value or cash flows are expected to offset the hedged item.

Hedged item: An asset, liability, forecast transaction, firm commitment or net investment exposed to a designated risk.

Fair value hedge: A hedge of exposure to changes in the fair value of a recognised item or firm commitment.

Cash flow hedge: A hedge of variability in cash flows that could affect profit or loss.

Net-investment hedge: A hedge of foreign-exchange exposure arising from a net investment in a foreign operation.

Hedge ratio: The relationship between the quantity of the hedging instrument and the quantity of the hedged item used in risk management.

Hedge ineffectiveness: The portion of changes in the hedging instrument that does not offset the hedged risk.

Other comprehensive income: A statement-of-profit-and-loss-related presentation category used for specified gains and losses outside current profit or loss.

Cash flow hedge reserve: The accumulated OCI component associated with an effective cash flow hedge.

Basis adjustment: Inclusion of an accumulated cash flow hedge amount in the initial carrying amount of a non-financial asset or liability.

Temporary difference: Difference between an asset or liability’s accounting carrying amount and its tax base.

Deferred tax: Tax recognised for temporary differences expected to reverse in future periods.

ISDA Master Agreement: Standard contractual framework governing OTC derivative transactions between counterparties.

Confirmation: Transaction-specific document recording the economic terms of a derivative.

Credit Support Annex: Collateral agreement specifying margin and collateral arrangements.

Close-out netting: Combining terminated transactions into one net amount after default or termination.

Trade repository: Infrastructure that receives and stores regulatory derivatives-trade data.

Wrong-way risk: Risk that exposure to a counterparty increases when that counterparty’s creditworthiness deteriorates.

Review Questions

5 Short Answer Questions

1. What are the three principal types of hedge accounting under IFRS 9?
2. Why must hedge documentation be completed at or before inception?
3. What is the purpose of the cash flow hedge reserve?
4. Why can accounting and tax treatment of a derivative differ?
5. What is the function of an ISDA Master Agreement?

5 Long Answer Questions

1. Explain the IFRS 9 qualifying criteria for a hedging relationship and discuss the role of the economic relationship.
2. Compare the accounting treatment of fair value hedges and cash flow hedges.
3. Analyse how temporary differences arise from derivative instruments and how IAS 12 addresses them.
4. Discuss the legal significance of close-out netting, collateral and governing-law provisions.
5. Evaluate the governance framework required for a multinational derivative programme.

3 Analytical / Application Questions

1. A company designates a forward contract against a highly probable foreign-currency purchase. Explain the accounting, tax and documentation steps required from inception through settlement.
2. A hedge has matching notional amounts but different repricing dates and reference rates. Analyse the likely sources of ineffectiveness and propose monitoring methods.
3. A counterparty in a foreign jurisdiction enters insolvency while substantial collateral is outstanding. Identify the legal, liquidity, reporting and accounting issues management should investigate.

Multiple Choice Questions with Answers

Question 1

Which item must be formally identified in an IFRS 9 hedge designation?

A. The hedging instrument and hedged item

B. Only the counterparty’s credit rating

C. Only the expected tax deduction

D. The entity’s dividend policy

Correct Answer: A. The hedging instrument and hedged item

Question 2

In a qualifying cash flow hedge, where is the effective portion generally recognised initially?

A. Immediately in revenue

B. In other comprehensive income

C. Directly in retained earnings

D. Only as a contingent liability

Correct Answer: B. In other comprehensive income

Question 3

Which statement about the IFRS 9 effectiveness requirement is correct?

A. A universal 80–125 percent bright-line test is mandatory

B. No effectiveness assessment is required for forecast transactions

C. An economic relationship and appropriate effectiveness assessment are required

D. Only the derivative’s maturity determines effectiveness

Correct Answer: C. An economic relationship and appropriate effectiveness assessment are required

Question 4

A temporary difference of CU 120,000 is subject to an enacted tax rate of 25%. What is the indicated deferred-tax amount before recognition restrictions?

A. CU 3,000

B. CU 30,000

C. CU 48,000

D. CU 120,000

Correct Answer: B. CU 30,000

Question 5

What is a principal purpose of a Credit Support Annex?

A. To define collateral and margin arrangements

B. To replace all trade confirmations

C. To determine the entity’s functional currency

D. To eliminate all market risk

Correct Answer: A. To define collateral and margin arrangements

Question 6

If a forecast transaction in a cash flow hedge is no longer expected to occur, what is the usual accounting consequence for the related accumulated amount?

A. It is always left in OCI permanently

B. It is generally reclassified to profit or loss

C. It is recognised as share capital

D. It is ignored until the next audit

Correct Answer: B. It is generally reclassified to profit or loss

Question 7

Which risk can arise from daily variation-margin calls even when a hedge is economically successful?

A. Liquidity risk

B. Inventory obsolescence only

C. Patent infringement risk

D. Elimination of credit risk in every circumstance

Correct Answer: A. Liquidity risk

Question 8

What does close-out netting generally seek to achieve?

A. Conversion of all derivatives into equity

B. Settlement of terminated transactions as one net amount

C. Removal of all collateral requirements

D. Deferral of every tax liability

Correct Answer: B. Settlement of terminated transactions as one net amount

Question 9

Which standard is principally associated with fair-value measurement and related disclosures?

A. IFRS 2

B. IFRS 13

C. IAS 10

D. IAS 41

Correct Answer: B. IFRS 13

Question 10

In the illustrative hedge, the derivative gain is CU 120,000 and the offsetting hedged exposure is CU 115,000. What is the apparent difference?

A. CU 5,000

B. CU 15,000

C. CU 115,000

D. CU 235,000

Correct Answer: A. CU 5,000