Cash flow hedges
Cash flow hedges are used to hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognised firm commitment.
Examples of cash flow hedges are:
Hedges of floating rate interest-bearing instruments;
Hedges of highly probable forecast transactions.
The effective portion of the gain or loss on the hedging instrument only is recognised directly in equity as hedging reserve while ineffective portion if any are to be recognized in the profit and loss. Fair value changes remain in the equity until cash flow is recognized.
Hedge item will not be remeasured at fair value therefore no accounting entries is require in respect of hedge item whether it is expected a cash flow from the future purchase and sale transactions or from future cash flow related to existing asset and liability.
Hedging instrument should be recorded at the fair value using certain assumptions and estimated discounted value of the future cash flows
Interest rate swap agreement entered with a bank for interest on loan from another bank. This is cash flow hedge or fair value hedge. Liability / assets are recognized based on Market to mark value.
If deal was of 100 and liability recognized is 5 does that mean that we can terminate the agreement and have to pay 5.
Can interest rate swap cap payment be capitalized if other interest on loan is capitalized.
If interest rate swap is to convert floating rate into fixed rate, it will be considered as cash flow hedge and if fixed rate loan is conveted to floating through IRS(interest rate swap) it will be considered as fair value hedge.
Yes as per IAS 23 interest expense on IRS can be capitalized.
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