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Akuntansi Derivatif dan Hedging

Direktorat Jenderal Pengelolaan Utang

Presented : Dwi Martani

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Agenda

1. 2. 3. 4 4.

Latar Belakang Akuntansi Standar Akuntansi Ilustrasi Transaksi

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Derivative e at e Secu Securities t es

Latar Belakang

Market risks

commodity price risk

interest rate risk

foreign currency risk

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Instrumen Keuangan

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Derivative Securities

Hedges adalah kontrak yang melindungi dari risiko pasar misalnya, misalnya forward, forward options options, and swaps. swaps
Derivative securities, or simply derivatives,

adalah kontrak yang nilainya diturunkan dari nilai aset lain atau item ekonomi tertentu saham/stock, bond, commodity price, interest rate, or currency exchange rate Sulit untuk mencari derivatif yang benar-benar dapat melindungi diri dari risiko. Risiko Ri ik ketidakpastian k tid k ti di masa mendatang d t Melindungi dari risiko = memastikan ketidakpastian. Kontrak lindung nilai memiliki risiko

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Derivative Financial Instruments

A derivative is a financial instrument that meets the following three criteria: Its value changes in response to a change in an underlying Scope Exemption: IAS 39:5 exempts contracts which meet the definition of a derivative from the standard if the contract is entered into to meet the entitys usual purchase, sale or usage requirements
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Requires little or no initial investment

Settled at a future date

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Derivative Securities
Instrumen keuangan atau kontrak lain dengan karakteristik:
Nilainya berubah akibat dari perubahan variabel yg mendasari (spt suku bunga, bunga harga, harga nilai tukar, dll). Tanpa investasi awal neto atau nilainya lebih k il dari kecil d i nilai il i kontrak k t k sejenis j i yang memberi b i pengaruh yang sama thd perubahan faktor pasar. Diselesaikan pd tgl tertentu di masa mendatang.

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Tujuan Akuntansi Hedging

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Klasifikasi Derivatif F Freestanding t di derivatif d i tif ( ti (option, forward contract, swap, future contract) t t) Embedded derivatif

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Derivative Financial Instruments

Example of derivative instruments and their underlying Types of derivative instruments Option contracts (call and put) Forward F d contracts t t e.g. foreign exchange forward contract Future F t contracts t t e.g. commodity futures Swaps Underlying Security price Used by Producers, trading firms Producers firms, financial institutions, and speculators V i Various companies i

Foreign F i exchange rate Commodity C dit prices Interest rate

Producers P d and d consumers Financial institutions

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Derivative Securities
Derivatives e at es

Hedge Fair Value Hedge Cash Flow Hedge Foreign Currency Hedge Cash Flow Hedge

Speculative

Fair Value Hedge

Hedge of Net Investment in Foreign O Operation ti

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Derivative Financial Instruments


1. Manage market risk 2. Reduce borrowing cost 3. Profit from trading or speculation

Use of derivatives

Types of derivatives
1 For 1. Forward ard type t pe derivatives deri ati es such s ch as forward for ard contracts, contracts f future t re contracts and swaps 2. Option-type derivatives such as call and put options, caps and collars and warrants 3. Free standing derivatives 4. Embedded derivatives

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Forward Contracts
An agreement between two parties (counterparties) whereby one party agrees to buy and the other party agrees to sell a specified amount (notional amount) of an item at a fixed price (forward rate) for delivery at a specified future date (forward date) Can either be a forward purchase contract or a forward sales contract, depending on the perspective of the counterparties

A Company

Sells Forward Contract

B Company

Forward sales contract


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Forward purchase contract


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Forward Contracts
They entail counterparty risks They are can be tailored to specific needs of counterparties They involve lower transaction costs

Not standardized contracts as they are not traded on an exchange

Fair value of forward contract:


Notional x amount where (Current forward rate contracted forward rate ) (1+r)
t

Contracted forward rate is forward rate fixed at inception Current forward rate is forward rate for remaining period to maturity

r = discount rate t = period to maturity

At inception date, the fair value of a forward contract is nil.


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Future Contracts
A future contract is similar to a forward contract except that it is a standardized contract and is traded on an exchange Futures contracts are marked-to-market and settled on a daily basis Futures contracts require payment of a margin deposit which has to be maintained throughout the contract period Wide range of exchange-traded future contracts
Commodity futures Interest rate futures Currency y futures

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Option Contracts
Contract that gives holder the right but not the obligation to buy or sell a specified item at a specified price 2 type of option contracts
1. Call option right, but not obligation to buy 2. Put option right, but not obligation to sell

Can be American option (exercisable anytime to expiration) or European option (exercisable only on maturity date) Can also be customized (not traded) or standard contract quoted on exchange (listed options)

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Option Contracts
Main features
Purchaser (holder) pays premium to seller (writer of option) Holder has the right, but not obligation to perform; while write has obligation g to p perform Asymmetrical pay-off profile Holder has limited loss (due to premium) and unlimited gain Writer has limited g gain and unlimited loss

Relationship between the strike price and the underlying


Strike price> Underlying y g (spot price) Holder of call option Holder of put option
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Strike price> Underlying y g (spot price) At-the-money At-the-money


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Strike price> Underlying y g (spot price) In-the-money Out-of-the-money


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Out-of-the-money In-the-money

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Option Contracts

Fair value of option contract


Fair value of an option = Intrinsic value + Time value

Listed options = quoted price Not traded options = Valuation model ( Black-Scholes model)

Diminishes over time Zero at expiration

Call option = Max [0, Notional amount x (Spot price Strike Price) Put option = Max [0, Notional amount x (Strike price Spot Price)

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Embedded Derivatives
Derivative that is part of a hybrid financial instrument
Hybrid Instrument Host Instrument Embedded derivative: Linked to underlying and change in underlying causes change in cash flow

Example is bond whose ultimate proceed are linked to price of commodity, such as oil, or to a consumer price index
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Tan & Lee Chapter 9

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Split Accounting of Embedded Derivatives


IAS 39 requires embedded derivatives to be separately recognized from the host instrument and accounted for in the same way as a stand-alone derivative if the following conditions are met:

Conditions for separation of embedded derivative Economic characteristics and risk of host instrument are not closely related to that of the derivative Hybrid instrument is not measured at fair value, with changes in fair value recognized in profit and loss

There is a separate instrument with same terms as the embedded derivative

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Accounting for Derivatives

Default accounting treatment for derivatives under IAS 39: Derivatives are classified under the Fair Value through Profit or Loss category and changes in their fair values are taken to income statement Exception - when a derivative is designated as a hedge of an identified risk and the hedge is effective effective. In this case case, accounting for the derivative follows hedge accounting rules

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Accounting for Forward Contract


At inception During life of contract Dr Forward Contract (asset) Cr Gain on forward contract Closing position or at expiration Dr Cash Cr Forward contract

No j journal entry y as fair value is nil

or Dr Loss on forward contract Cr Forward Contract (liability) j fair value and Adjust record gain/loss Dr Forward contract Cr Cash

Close out and record net settlement of contract


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Accounting for Future Contract


At inception During life of contract Dr Cash Cr Gain on future contract Closing position or at expiration Dr Cash Dr Gain on future f t re contract Cr Margin Contract Dr Cash Cr Loss on future contract Cr Margin Contract Close out and recover margin deposit
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Dr Margin deposit Cr Cash

or Dr Loss on futures contract Cr Cash

payment y of Record p initial margin deposit


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Record daily y settlement of future contracts


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Purchased Option Contract


At inception During life of contract Dr Option Contract Cr Gain on future contract Closing position or at expiration Dr Cash* Dr Gain on option contract Cr Option Contract Dr Cash* Cr Loss on option contract Cr Option Contract
(* assume expires in-the-money)

Dr Option contract (asset) Cr Cash

or Dr Loss on futures contract Cr Option p Contract

payment y of Record p initial margin deposit


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Adjust j for fair value and record gain/loss


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Close out and record net settlement of contract


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Written Option Contract


At inception During life of contract Dr Option Contract Cr Gain on future contract Closing position or at expiration Dr Option contract Cr Gain on Option Contract (Expires out-of-themoney) Dr Option contract Dr Loss on option Cr Cash (Expires in-the-money)

Dr Cash Cr Option contract (liability)

or Dr Loss on futures contract Cr Option p Contract

Record p payment y of initial margin deposit


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Adjust j for fair value and record gain/loss


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Close out and record net settlement of contract


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Hedging
Propose is to neutralize an exposed risk
Loss on hedge item offset by gain on hedging instrument Reduce volatility than preserve gains

Other ways of hedging through non-derivative derivatives


Money market instruments (money market hedge) Natural hedge (offsetting foreign currency assets and liability in the same currency)

Special accounting rules called hedge hedge accounting accounting applies when derivatives are used for hedging purposes

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Rationale of Hedge Accounting


Arises because of the mismatch of income-offsetting income offsetting effect between hedged item and hedging instrument Situations requiring hedge accounting
Hedge item and hedging instrument are measured using different bases (One is at cost while the other is at fair value) Hedged item yet to be recognized in financial statement Different treatment for changes in fair value (changes taken to equity while the other is taken to income statement)

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Risks That Qualify for Hedge Accounting

Interest rate risk

Foreign exchange risk

Spec c risks Specific s s that qualify for hedge accounting

Price risk

Credit risk

Risks must be specific risk, not general business risks

Possible for a derivative to hedge more than one risk

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Qualifying Hedging Instruments


(IAS 39: 72 73)

Instruments that qualify include:


D Designated i t dd derivatives i ti ( (except t written itt options) ti ) Embedded Derivatives Designated non-derivatives financial asset/ liability that hedge f i exchange foreign h risks i k only l

Value used to determine hedge effectiveness


If used in its entirety, fair value is used If broken into time value and intrinsic value, permissible to use intrinsic value. However, it must be explicitly documented at inception

If derivative is used as a hedge of more than 1 risk


Individual designated component must meet hedge accounting criteria Permissible for portion of notional amount to be designated
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Qualify

Qualifying y g Hedged g Items


(IAS 39: 78 -79)
Do not qualify Held-to-maturity instruments (regardless of fixed rate or variable rate) Investment in an associated company

Financial assets and liabilities with exposure to changes in fair value Non-financial assets exposed to foreign exchange or price risks Firm commitment Highly g yp probable forecast transaction with exposures to future cash flows Net investment in foreign entity
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Criteria for Hedge Accounting


(IAS 39 39: 88)

C diti Conditions t to b be met tf for h hedge d accounting ti t to apply l


Enterprise must have exposure to risk that affects income statement Derivative contract specifically entered to hedge underlying exposure Hedge must be highly effective Effectiveness of hedge can be reliably measured Hedging relationship must be formally documented at the inception of the hedge
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Assessing Hedge Effectiveness


IAS 39:9 - The degree to which changes in the fair value or cash flows of the hedged item that is attributable to a hedged risk are offset by changes in the fair value or cash flow of the hedging instrument Hedge effectiveness is evaluated
Prospectively on inception of hedge; and Retrospectively p y on an ongoing g g basis

On inception, hedge effectiveness is assessed on


Comparison of the principal or critical terms Historical analysis Correlation analysis

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Efektivitas Hedging

Efektifitas dihitung secara prospektif dan retrospektif Hasil H il aktual kt l berada b d dalam d l ki kisaran 80 125% Seluruh lindung nilai yang tidak efektif diakui dalam laporan L/R (termasuk ketidakefektifan dalam kisaran 80 -125%)

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Efektivitas Hedging

Risks must be identifiable Risk must be foreseeable y measured Risk must be realistically Precise attribution of hedging instrument to hedged g item Reason: p of hedging g g in financial report p should be Impact as neutral as possible

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Kriteria & Dokumentasi


Tdpt kebijakan tertulis, tujuan manajemen risiko & strategi lindung nilai. Hubungan H b li d lindung nilai il i diharapkan dih k efektif f ktif utk tk saling li menghapuskan perubahan nilai wajar.

Kriteria

Dokumentasi
Identifikasi hedged items vs hedging instruments. Sifat risiko yang dilindungi Strategi manajemen risiko dan lindung nilai Penilaian efektifitas instrumen lindung nilai

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Assessing Hedge Effectiveness


During the duration of hedge, hedge effectiveness is assessed on dollar-offset method: Hedge effectiveness ratio (HER):

Hedge effectiveness Changes in fair value or future cash flow of hedging instrument = (or delta ratio) Changes in fair value or future cash flow of hedged item 08 0.8 12 1.25

Effective hedge (IAS 39: AG 105b)

Exceptions for effective hedge even if HER falls out of range


IAS S 39 a allows o s hedge edge e effectiveness ect e ess to be assessed o on cu cumulative u at e bas basis s if hedge is designated and conditions are properly documented

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Assessing Hedge Effectiveness


Exclusion of time value of certain derivatives to be excluded from hedge relationship
Derivative separated into 2 component 1. Time value (options) or interest (forwards) 2. Intrinsic (options) or spot element (forwards) Excluded time value taken to income statement as per default treatment Should result in highly effective hedge, as intrinsic/ spot component moves in tandem with underlying, while time/interest component does not If critical terms of hedging instruments and hedged item are exactly the same, HER should be equal or around 1

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Classification of Hedging Relationships


Explanation Hedge of the the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such asset, liability or firm commitment, which is attributable to a particular risk i k and d could ld affect ff t profit fit or loss l (IAS 39 39:86a) 86 ) Hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognized i d asset t or li liability bilit ( (such h as all ll or some f future t interest payment on variable debt instrument )or a highly probable future transaction, and (ii) ( ) could affect p profit or loss ( (IAS 39:86b) ) Hedge of the foreign currency risk associated with a foreign operation whose financial statements are required to be translated into the presentation currency of the parent company
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Causes Fair value hedge

Cash flow hedge

Hedge of a net investment in a f i entity foreign tit


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Classification of Hedging Relationships


The designation of a derivative as a fair value hedge or a cash flow hedge is determined by the hedged risk, that is, whether the entity has a fair value exposure or a cash flow exposure An exception where a derivative can be designated as either a fair value hedge or a cash flow hedge is where the hedged risk is the foreign exchange risk of a firm commitment

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Accounting for a Fair Value Hedge

Hedged Item (recognized asset or liability or firm commitment) Change in fair value

Hedging Instruments Change in fair value

Income statement Gain (loss) on hedging instrument offset loss (gain) on hedged item

Balance sheet Change in fair value adjusted against carrying amount


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Change in fair value adjusted against carrying amount


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Illustration 1: Hedge of inventory (fair value hedge)


Inventory of 10,000 ounces of gold Carried at cost of $3 $3,000,000 000 000 ($300 per ounce) Price of gold was $352 per ounce

Scenario 31/10/20x3

1/11/20x3
Sold forward contract on 10,000 10 000 ounce for forward price of $350 ounce Forward contract matures on 31/3/20x4

31/12/20x3
F Forward d price i f for 31/3/20 31/3/20x4 4 contract t t was $340 per ounce and d spot t price i of gold was $342 per ounce Hedge effective ratio of 1 on 31/12/20x3

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Illustration 1: Hedge of inventory (fair value hedge)

1/11/20x3 No entry or just a memorandum entry as the fair value of the forward contract is nil 31/12/20 3 31/12/20x3
Dr Cr C Forward contract . Gain on Ga o forward o a d contract co t act ... 100,000 100,000 00,000 Taken to income statement 100,000

Gain on forward contract: 10,000 x ($340 -$350) Dr Cr Loss on inventory Inventory .. 100 000 100,000

Gain on forward contract: 10,000 x ($342 - $352)

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31/3/20x4 Inventory y is sold to third-party p y at $ $330 p per ounce ( (also maturity y date of forward contract
Dr Cr Forward contract . Gain on forward contract ... 100,000 100 000 100,000

Illustration 1: Hedge of inventory (fair value hedge)

Gain on forward contract: 10,000 x ($330 -$340) Dr Cr Loss on inventory Inventory .. 120 000 120,000 120,000

Gain on forward contract: 10,000 x ($330 - $342) Dr Cr Cash .. Sales . 3,300,000 3,300,000

Sale of inventory: 10,000 10 000 x $330


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Accounting for a Cash Flow Hedge


Effective Cash Flow Hedge (IAS 39:95)

Effective portion of gain/ loss Recognized directly in equity through statement of changes in equity

Ineffective portion of gain/ loss Recognized in profit or loss

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Accounting for a Cash Flow Hedge


Cash flo flow hedges are applicable to the following: follo ing

Forecasted transactions involving financial and d non-financial fi i l assets/liabilities which will result in cash inflow/ outflow

Interest I t t rate t swaps

Other transactions which affect future cash flows

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Effective and ineffective portions

Scenario 1/1/20 1 1/1/20x1


Entered into futures contract to hedged forecast transaction at 30/4/20x1 Classified as cash flow hedge Period ending 31/1/20x1 28/2/20x1 31/3/20x1 30/4/20x1
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in fair value of future contracts $100 90 103 (38)


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in present value of expected future cash flow $(105) (80) (105) 45


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Illustration 2:
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Effective and ineffective portions of a cash flow hedge


Effective Lesser of portion two credited/ cumulative (debited) amount in to equity in absolute current period terms (c) ( $100 185 290 245 $100 85 105 (45) Ineffective portion credited/ (debited) to income statement in current period $0 5 (2) 7

Determination of effective and ineffective portions of a cash flow hedge

Period ending 31/1/20x1 28/2/20x1 31/3/20x1 30/4/20x1

Cumulative in FV of future contracts (a) $100 190 293 255

Cumulative in PV of expected cash flow (b) $(105) (185) ( ) (290) (245)

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Hedge of a Net Investment i a Foreign in F i Entity E tit


Hedge risk is foreign exchange risk
Applies to foreign operations whose functional currencies are the currencies of the country where the foreign operations are located Closing g rate method may y result in significant g translation loss from depreciating currencies

Accounting g treatment similar to cash flow hedge g


Cumulative change in fair value of hedging instrument (A) Cumulative translation difference on net investment (B)

Hedge effectiveness =

Hedge is effective if the delta ratio is between 0.8 and 1.25. Unlike a fair value hedge or a cash flow hedge, a non-derivative is allowed to be the hedging instrument instrument, for example example, a foreign currency loan.
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Hedge g of a Net Investment in a Foreign g Entity y

Scenario
Functional currency is the dollar ($) Acquired 100% interest in foreign company (functional currency is FC)

31/12/20x3
Exchange rate is $1.85 to FC1 Loan of FC1 FC1,200,000 200 000 at 5% interest taken to hedge foreign investment Foreign currency translation reserves showed $15,000 (credit balance)

31/12/200x4 31/12/200
Exchange rate is $1.70 to FC1 Average rate is $1.78 to FC1 Foreign company reported net profit of FC380,000
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Hedge g of a Net Investment in a Foreign g Entity y

Translation difference in foreign investments FS for 31/12/20x4


On net assets on 1/1/20x4 (FC 1,200,000 x $(1.70-1.85) . On net profit for 20x4 (FC380,000 x $(1.70-1.85) .. Translation loss for 20x4 Foreign currency translation reserves (credit balance) $(180,000) (30,400) $(210,400) (195,400)

Journal entries for parent 31/12/20x3


Dr Cr Cash .. Loan payable ... 2 200 000 2,200,000 2,200,000

The loan payable is designated as a hedge of the net investment: FC1 200 000 x spot FC1,200,000 t rate t of f $1 $1.85 85
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Hedge of a Net Investment in a Foreign Entity


Interest expense p . Accrued interest .. 106,800 , 106,800

31/12/20x4
Dr Cr

Interest expense during the year at 5% x FC1,200,000 x $1.78 Dr Cr Cr Accrued interest .. Cash .. Exchange gain . 106,800 102,000 Taken to equity 4 800 to 4,800 t offset ff t translation loss

Settlement of accrued interest at year-end Dr Cr Loan payable ... Foreign currency translation reserves 180,000

180,000

Exchange gain on FC loan taken directly to equity: FC 1,200,000 x ($1.70 - $1.85)


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Discontinuation or Termination of Hedge Accounting

Consideration for discontinuation or termination of hedge accounting

Hedging instrument has reached maturity date or is closed off or terminated

Criteria for hedge accounting is no longer met

Hedge designation is revoked

Accounting treatment depends on type of hedge

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Penghentian Lindung Nilai

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Evaluation of Hedge Accounting


Objective of hedge accounting
Reflect effectiveness of hedging activities of a firm Reduce volatility of reported earnings

Compliance with hedge accounting may result in considerable expenditure of resources There are challenges in compliance with hedge accounting criteria for macro hedges Issue is whether the additional costs of compliance more than offset the benefit of applying hedge accounting

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Referensi

Tan & Lee Advance Financial Accounting, ch 9: Accounting f Derivatives for D i ti and dH Hedge d A Accounting ti PSAK 50 dan 55 IAS 32 dan 39 International Financial Reporting Standards Certificate Learning Material The Institute of Chartered Accountants Accountants, England and Wales Materi Public Hearing PSAK 55

dwimartani@yahoo.com atau martani@ui.ac.id 081318227080/08161932935