Imagine a chocolate maker that has agreed to buy cocoa in six months at a price it does not yet know. It can buy a forward contract to lock the price. Economically, the contract and the purchase cancel each other out. But in the accounts they do not.
The forward contract is marked to fair value every year end, so its gains and losses hit profit, while the purchase it protects is not recorded until it happens. Profit swings for no real reason. Hedge accounting is an optional model in International Financial Reporting Standard (IFRS) 9 that lines up the timing of the two, so that the accounts show the protection the company actually bought.
This topic covers what hedging is, the qualifying hedged items and hedging instruments, the conditions for hedge accounting, effectiveness, the three types of hedge (fair value, cash flow and net investment in a foreign operation), basis adjustments, discontinuation and rebalancing. The previous topics covered classification and impairment. The next topic covers presentation and disclosure of financial instruments.
In 30 seconds
Hedge accounting is a choice. It is allowed only if the hedge is formally designated and documented at the start, there is an economic relationship between the hedged item and the hedging instrument, credit risk does not dominate, and the hedge ratio matches the one used in risk management.
In a fair value hedge, the gain or loss on the instrument goes to profit or loss. The hedged item is adjusted for the hedged risk with the other side also in profit or loss, so the two offset.
In a cash flow hedge, the effective part of the instrument’s gain or loss goes to other comprehensive income (the cash flow hedge reserve) and is reclassified to profit or loss when the hedged cash flows affect it. The ineffective part goes straight to profit or loss. For a forecast purchase of a non-financial item, the reserve is added to the asset’s cost (a basis adjustment).
A net investment hedge works like a cash flow hedge and is reclassified on disposal of the foreign operation. Voluntary discontinuation is not allowed.
Key terms in plain English
| Term | What it means |
|---|---|
| Hedged item | The exposure being protected, such as a loan, inventory, a forecast sale or a net investment in a foreign operation |
| Hedging instrument | The contract used to offset it, usually a derivative |
| Hedge ratio | The quantity of hedging instrument relative to the quantity of hedged item |
| Fair value hedge | A hedge of changes in the fair value of a recognised asset or liability or a firm commitment |
| Cash flow hedge | A hedge of variability in cash flows of a recognised item or a highly probable forecast transaction |
| Net investment hedge | A hedge of the foreign exchange risk in the net assets of a foreign operation |
| Effective portion | The part of the hedging gain or loss that offsets the hedged item |
| Cash flow hedge reserve | The equity reserve in which the effective portion is accumulated |
| Basis adjustment | Adding the reserve to the cost of the non-financial asset that the hedged purchase creates |
| Rebalancing | Adjusting the hedge ratio of an existing relationship without ending it |
Syllabus check
IFRS 9 is examinable under syllabus area B (financial assets). This topic covers:
- the principles of hedge accounting and the qualifying criteria;
- fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation;
- discontinuation and rebalancing.
CAMA 2020 and hedge accounting
The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow IFRS and give a true and fair view.
| Section | What it says | Link to hedge accounting |
|---|---|---|
| s. 377(1) and s. 378 | Directors prepare statements that follow IFRS and give a true and fair view | Hedge accounting is used only where IFRS 9 allows it |
| s. 374(1) | The company keeps accounting records | Hedge documentation, designation dates and effectiveness assessments are kept |
| s. 385 | The directors’ report covers performance, risk management and compliance | Risk management strategy and use of derivatives may need comment |
| s. 404(7) | The audit committee reviews policies and internal control | It can review the hedging policy and the controls over designation |
What hedging is
A hedge is a risk management action in which one position (usually a derivative) offsets the exposure on another. A Nigerian importer with a US dollar payable in three months can buy dollars forward to fix its naira cost. Economically the gains and losses cancel.
Without hedge accounting, the forward contract is at fair value through profit or loss while the payable is retranslated under International Accounting Standard (IAS) 21, and other timing differences arise. Hedge accounting reduces the mismatch. It is optional, and an entity that does not meet the conditions simply accounts for the derivative at fair value through profit or loss.
Eligible hedged items and hedging instruments
| Hedged item | Notes |
|---|---|
| A recognised asset or liability | Including a component, such as the benchmark interest rate in a fixed-rate loan, or a proportion |
| An unrecognised firm commitment | Fair value hedge, or cash flow hedge for foreign exchange risk |
| A highly probable forecast transaction | Cash flow hedge |
| A net investment in a foreign operation | Hedge of the foreign exchange risk between the operation’s functional currency and the parent’s |
In the consolidated statements, only exposures to parties outside the group can be hedged, except that foreign exchange risk on intragroup monetary items that is not fully eliminated on consolidation can be.
Hedging instruments are mainly derivatives measured at fair value through profit or loss (forwards, swaps and purchased options). A non-derivative financial asset or liability at fair value through profit or loss can be used. For foreign exchange risk only, any non-derivative financial instrument, such as a foreign currency loan, can be used.
An instrument is normally designated in full. But the entity may designate only the intrinsic value of an option, the spot element of a forward, or a proportion of the nominal amount.
Conditions for hedge accounting
- The relationship consists only of eligible hedged items and hedging instruments.
- At inception there is formal designation and documentation: the hedged item, the hedging instrument, the risk being hedged and how effectiveness will be assessed (including sources of ineffectiveness and how the hedge ratio is set).
- The relationship meets the effectiveness requirements: (a) there is an economic relationship between the item and the instrument; (b) the effect of credit risk does not dominate the value changes; and (c) the hedge ratio is the same as the one the entity actually uses for risk management.
IFRS 9 removed the 80% to 125% retrospective test of IAS 39. The assessment is forward-looking and principles-based, made at inception and at each reporting date (at least). The method must be documented in advance. Ineffectiveness is still measured and recognised.
The three types of hedge
| Type | Hedges | Accounting |
|---|---|---|
| Fair value hedge | Changes in fair value of a recognised item or a firm commitment | Instrument gain or loss in profit or loss. Hedged item adjusted for the hedged risk, also in profit or loss |
| Cash flow hedge | Variability of cash flows of a recognised item or a highly probable forecast transaction | Effective part in other comprehensive income (reserve), reclassified when the cash flows affect profit or loss. Ineffective part in profit or loss |
| Net investment hedge | Foreign exchange risk on net assets of a foreign operation | As a cash flow hedge. Reserve is reclassified on disposal of the operation |
Fair value hedge in more detail
The carrying amount of the hedged item is adjusted for the change in value due to the hedged risk, even if it would otherwise be at cost. For an item measured at amortised cost, the adjustment is amortised to profit or loss (from no later than when hedge accounting stops). Because both sides are in profit or loss, the net effect is the ineffectiveness.
If the hedged item is a debt asset at fair value through other comprehensive income (FVOCI), the part of its fair value change due to the hedged risk goes to profit or loss and the rest stays in other comprehensive income.
If the hedged item is an equity investment elected to FVOCI, the gain or loss on the hedging instrument goes to other comprehensive income, along with the changes in the investment.
For a firm commitment, the cumulative change in its fair value due to the hedged risk is recognised as an asset or liability, with the other side in profit or loss. When the commitment results in a recognised asset (such as plant), that carrying amount is adjusted by the cumulative amount.
Cash flow hedge in more detail
The amount in the reserve is the lower of (a) the cumulative gain or loss on the hedging instrument and (b) the cumulative change in the present value of the hedged expected cash flows. Any excess of the instrument’s gain or loss is ineffective and goes to profit or loss now. When the forecast transaction occurs:
- If it results in a non-financial asset or liability (inventory, plant), the reserve is removed and added to the cost of the asset. This is the basis adjustment. It does not pass through profit or loss, and affects profit as the asset is depreciated or sold.
- Otherwise (for example a sale), the reserve is reclassified to profit or loss in the period the hedged cash flows affect profit or loss.
- If the forecast transaction is no longer expected to occur, the reserve is reclassified to profit or loss immediately.
Net investment hedge in more detail
The parent’s net investment in a foreign subsidiary is translated at the closing rate and the exchange differences go to other comprehensive income (the translation reserve). To hedge it, the parent designates an instrument denominated in the foreign operation’s currency (a foreign currency borrowing or a derivative). It can be held by any group entity.
The effective part of its exchange difference goes to other comprehensive income and offsets the translation difference. The instrument cannot exceed the net investment. On disposal of the operation, both reserves are reclassified to profit or loss. Only the difference between the operation’s functional currency and the parent’s functional currency can be hedged (International Financial Reporting Interpretations Committee (IFRIC) Interpretation 16).
Discontinuation and rebalancing
Hedge accounting cannot be stopped voluntarily. It ends only if the hedging instrument expires, is sold, terminated or exercised, or the qualifying criteria are no longer met (and the hedge ratio cannot be adjusted to restore them), or the risk management objective changes.
- Rebalancing adjusts the hedge ratio, prospectively, without ending the relationship.
- Fair value hedge ends: the basis adjustment stays and is amortised to profit or loss for an item at amortised cost.
- Cash flow hedge ends: the reserve stays in other comprehensive income until the forecast transaction occurs. If the transaction is no longer expected, it is reclassified to profit or loss at once.
Disclosure
IFRS 7 requires the risk management strategy, the effect of hedging on the amounts, timing and uncertainty of future cash flows, the effect on the statement of financial position and performance, and a reconciliation of the reserves, with sensitivity analysis for market risks.
The rules in more depth
Why symmetry matters
The point of hedge accounting is that the gain on one position and the loss on the other fall in the same period and the same part of the statements. If they do not, profit shows volatility the company has already removed economically.
Why the lower-of rule in a cash flow hedge
The reserve cannot exceed what the hedged item has actually lost. Over-hedging gives a gain that is not offset by anything, so it is recognised at once.
Why a Naira loan cannot hedge a Cedi subsidiary
A Nigerian parent with a naira functional currency has no exchange difference on a naira loan. Only an instrument in the foreign operation’s currency produces an exchange difference that can offset the translation difference.
Effect on analysis
Large balances in the cash flow hedge reserve show hedging gains and losses still to come into profit. Analysts compare the reserve with the hedged forecast sales or costs.
Worked examples
Example 1: fair value hedge of inventory. X Ltd holds 100 barrels of oil that cost ₦70 each. On 30 September the spot price is ₦100. It enters a forward contract to sell 100 barrels at ₦100 in 12 months. At 31 December the price (spot and forward) has fallen to ₦90.
- Forward contract (hedging instrument)
gain = (₦100 − ₦90) × 100 = ₦1,000.
Dr derivative asset ₦1,000; Cr profit or loss ₦1,000. - Inventory (hedged item): loss on the hedged risk = ₦1,000. Dr profit or loss ₦1,000; Cr inventory (basis adjustment) ₦1,000.
- Inventory carrying amount.
100 × ₦70 = ₦7,000 − ₦1,000 = ₦6,000.
Net effect on profit or loss = nil (apart from any ineffectiveness). - On sale, the cumulative adjustment is included in cost of sales.
Note: ICAN’s ledger for this example shows the inventory at ₦10,000 at the start and ₦9,000 at the end, but cost is ₦70 × 100 = ₦7,000. Ours is slightly different from ICAN’s. The entries and the nil net effect are the same.
Example 2: fair value hedge of a fixed-rate loan. Entity X has a ₦10m fixed-rate loan payable at 4% maturing in three years. To hedge the fair value exposure to a fall in the benchmark rate (which raises the value of the liability), it enters a receive-fixed, pay-floating swap. In year 1 the swap gains ₦120,000 and the loan’s value attributable to the benchmark rate rises by ₦118,000.
- Dr swap asset ₦120,000; Cr profit or loss ₦120,000.
- Dr profit or loss ₦118,000; Cr loan liability (basis adjustment) ₦118,000.
- Net gain in profit or loss = ₦2,000 (ineffectiveness). The loan is carried at ₦10,118,000 and unwinds to par by the effective interest method.
Note: ICAN describes the swap as protecting against “rises in market rates”. A receive-fixed swap gains when rates fall, which is what protects the issuer of fixed-rate debt. Ours is slightly different in wording.
Example 3: debt asset at FVOCI in a fair value hedge. X Plc buys a debt asset for ₦1,000,000 at FVOCI and hedges its benchmark rate risk with a swap. The asset’s fair value rises by ₦50,000, of which ₦40,000 relates to the hedged risk. The swap loses ₦40,000.
- Without hedge accounting: Dr asset ₦50,000; Cr other comprehensive income ₦50,000. Dr profit or loss ₦40,000; Cr derivative ₦40,000.
- With hedge accounting: Dr asset ₦50,000; Cr profit or loss ₦40,000; Cr other comprehensive income ₦10,000. Dr profit or loss ₦40,000; Cr derivative ₦40,000.
- Net profit or loss = nil. Only the unhedged ₦10,000 stays in other comprehensive income.
Example 4: cash flow hedge of forecast sales. A French airline expects to sell $1 million of tickets in six months. Its functional currency is the euro, and the spot rate is €1 = $1.00. It sells $1 million forward. At the first year end the forward is an asset of €80 (thousand) and the expected euro receipts have fallen by €75.
In the next period the forward gains a further €23, and the tickets are sold for €905, which is €20 less than forecast.
- Year end: effective portion = lower of 80 and 75 = 75. Dr derivative €80; Cr other comprehensive income €75; Cr profit or loss €5 (ineffective).
- Settlement:
cumulative gain on the forward = 103.
Cumulative fall in the hedged receipts = 75 + 20 = 95.
Reserve = lower = 95, so a further €20 to other comprehensive income and €3 to profit or loss.
Dr derivative €23; Cr other comprehensive income €20; Cr profit or loss €3. - Sale: Dr cash €905; Cr revenue €905. Reclassify the reserve: Dr other comprehensive income €95; Cr revenue €95. Forward settled: Dr cash €103; Cr derivative €103.
- Revenue = €1,000, the locked-in amount.
Ineffectiveness in profit or loss = €5 + €3 = €8 over the two periods.
The reserve is nil.
Example 5: basis adjustment. X Ltd (functional currency ₦) expects to buy a machine for $15,000 on 1 January 20X3. On 30 September 20X2 the rate is ₦350 = $1. It buys $15,000 forward at ₦350. At 31 December 20X2 the spot rate is ₦370, so the forward has gained ₦300,000. It buys the machine on 1 January 20X3 at ₦370.
- At the year end: Dr derivative ₦300,000; Cr other comprehensive income (cash flow hedge reserve) ₦300,000.
- On purchase: Dr machine ₦5,550,000 ($15,000 × ₦370); Cr cash ₦5,550,000. Forward settled: Dr cash ₦300,000; Cr derivative ₦300,000.
- Basis adjustment: Dr reserve ₦300,000; Cr machine ₦300,000.
- Machine cost.
₦5,550,000 − ₦300,000 = ₦5,250,000 ($15,000 at the hedged rate of ₦350).
With a 10-year life, depreciation = ₦525,000 and the carrying amount after one year = ₦4,725,000.
Example 6: net investment hedge. A Nigerian parent has a net investment in a Ghanaian subsidiary of GHS 5,000,000. The rate moves from ₦100 to ₦90 per GHS. To hedge, the parent borrows GHS 5,000,000 and designates the borrowing as a hedge of the net investment.
- Translation of the net investment.
GHS 5m × (₦100 − ₦90) = loss of ₦50m in other comprehensive income (translation reserve). - The borrowing falls in naira from ₦500m to ₦450m, a foreign exchange gain of ₦50m. As it is an effective hedge, it goes to other comprehensive income, not profit or loss. Dr borrowing ₦50m; Cr other comprehensive income ₦50m.
- Net effect in other comprehensive income = nil. Profit or loss is unaffected. On disposal of the subsidiary, the reserves for both are reclassified to profit or loss.
Note: ICAN’s example hedges a Ghanaian subsidiary with a ₦500m naira loan. For a parent whose functional currency is the naira, a naira loan has no exchange difference, so it cannot hedge the foreign exchange risk. The instrument must be in cedis (or a derivative on cedis), so ours is slightly different from ICAN’s. In the exam, state the currency of the hedging instrument.
How to score full marks
- State the risk, the hedged item, the hedging instrument and the type of hedge.
- Test the conditions: designation and documentation, economic relationship, credit risk and hedge ratio.
- Split effective and ineffective parts, using the lower-of rule for a cash flow hedge.
- Say where each amount goes: profit or loss, other comprehensive income, or the cost of an asset.
- Give the journals, labelled clearly.
- State when and how the reserve is released (reclassification, basis adjustment, or disposal).
- Mention disclosure under IFRS 7.
Common mistakes in the exam
- Treating hedge accounting as automatic. It is optional and needs documentation at the start.
- Putting the effective part of a cash flow hedge in profit or loss.
- Forgetting the lower-of rule when the instrument gains more than the hedged item loses.
- Recycling the reserve to profit or loss for a hedged purchase of a non-financial asset.
- Using a loan in the parent’s own currency as a net investment hedge.
- Hedging more than the net investment.
- Stopping a hedge voluntarily.
- Applying the old 80% to 125% test.
Quick revision
- Optional. Needs designation, documentation, economic relationship, credit risk not dominant and the right hedge ratio.
- Fair value hedge: both sides in profit or loss. Adjust the hedged item.
- Cash flow hedge: effective part (lower of the two cumulative amounts) in other comprehensive income. Ineffective part in profit or loss. Reclassify when the cash flows hit profit or loss. Basis adjustment for non-financial assets.
- Net investment hedge: like a cash flow hedge. Instrument in the foreign currency. Reclassify on disposal.
- No voluntary discontinuation. Rebalancing adjusts the ratio.
- CAMA 2020: ss. 377(1), 378, 374(1), 385, 404(7).
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. Hedge accounting under IFRS 9 is:
- Compulsory for all derivatives
- Optional, if the conditions are met
- Available without documentation
- Only for banks
Show the answer
B. Designation and documentation are needed at the start.
Question 2. In a fair value hedge, the gain or loss on the hedging instrument goes to:
- Other comprehensive income
- Profit or loss
- Equity directly
- The cost of the hedged item
Show the answer
B. The hedged item is also adjusted through profit or loss.
Question 3. The effective portion of a cash flow hedge is recognised in:
- Profit or loss
- Other comprehensive income
- Revenue immediately
- Retained earnings directly
Show the answer
B. It is accumulated in the cash flow hedge reserve.
Question 4. For a hedged forecast purchase of plant, the reserve is:
- Recycled to profit or loss at once
- Added to or deducted from the cost of the plant
- Left in equity forever
- Charged to the instrument
Show the answer
B. This is the basis adjustment.
Question 5. The effective portion of a cash flow hedge is the:
- Higher of the cumulative instrument and item changes
- Lower of the cumulative instrument and item changes
- Total instrument change
- Zero
Show the answer
B. The excess is ineffective and goes to profit or loss.
Question 6. A net investment hedge must use an instrument denominated in:
- The parent’s functional currency
- The foreign operation’s currency
- Any currency
- Gold
Show the answer
B. Otherwise there is no exchange difference to offset.
Question 7. IFRS 9 allows voluntary discontinuation of hedge accounting:
- At any time
- Never; only if criteria fail, the instrument ends or the objective changes
- Each year end
- On request of the auditor
Show the answer
B. Rebalancing may keep the relationship going.
Question 8. Which is NOT a qualifying condition?
- Formal documentation
- An economic relationship
- An 80% to 125% retrospective result
- Credit risk not dominating
Show the answer
C. That test was in IAS 39.
Question 9. On disposal of a foreign operation, the net investment hedge reserve is:
- Left in equity
- Reclassified to profit or loss
- Written off to retained earnings
- Added to goodwill
Show the answer
B. So is the translation reserve.
Question 10. Which section of CAMA 2020 requires the statements to follow IFRS?
- Section 378
- Section 400
- Section 405
- Section 409
Show the answer
A. IFRS 9 is part of IFRS.
Written questions
Question 11 (10 marks). (a) State the conditions that must be met before hedge accounting can be applied. (5 marks) (b) Distinguish a fair value hedge, a cash flow hedge and a hedge of a net investment in a foreign operation. (5 marks)
Question 12 (20 marks). (a) Delta Ltd holds 200 barrels of oil at a cost of ₦60 each. The spot price is ₦100 when it sells forward 200 barrels at ₦100. At the year end the price is ₦92. Show the entries and the carrying amount of the inventory. (5 marks) (b) Zed Ltd expects to sell $100,000 in six months and sells $100,000 forward.
At the first year end the forward has gained ₦4,000,000 and the present value of the expected naira receipts has fallen by ₦3,600,000. On settlement the forward has gained a cumulative ₦5,000,000 and the cumulative fall in the hedged receipts is ₦4,200,000. Calculate the amounts in other comprehensive income and in profit or loss at each date and state the treatment on sale.
(7 marks) (c) A parent has a net investment of GHS 5,000,000 and borrows GHS 5,000,000 to hedge it. The rate moves from ₦100 to ₦90. Calculate the amounts in other comprehensive income and explain the treatment on disposal. (4 marks) (d) Explain discontinuation and rebalancing of a hedge. (4 marks)
Question 13 (10 marks). Eze Ltd forecasts the purchase of a machine for $20,000. It buys $20,000 forward at ₦400. On the purchase date the spot rate is ₦430 and the machine is bought. The machine has a 10-year life. (a) Show the entries on purchase and the cost of the machine. (4 marks) (b) Calculate the depreciation for the first year.
(2 marks) (c) Explain why the reserve adjusts the cost and is not recycled to profit or loss. (2 marks) (d) State the treatment if the purchase is no longer expected. (2 marks)
Model answers
Show the model answer to Question 11
(a) Conditions (5 marks). The relationship has only eligible hedged items and hedging instruments. (1) There is formal designation and documentation at inception: the item, the instrument, the risk and how effectiveness will be assessed. (1.5) There is an economic relationship between the item and the instrument. (1) The effect of credit risk does not dominate the value changes. (1) The hedge ratio equals the one used for risk management. (0.5)
(b) Types (5 marks). A fair value hedge protects against changes in the fair value of a recognised item or firm commitment, with both sides in profit or loss. (1.5) A cash flow hedge protects against variability in cash flows of a recognised item or a highly probable forecast transaction, with the effective part in other comprehensive income and reclassified when the cash flows affect profit or loss.
(2) A net investment hedge protects the foreign exchange risk on a foreign operation’s net assets, accounted for like a cash flow hedge and reclassified on disposal. (1.5)
Show the model answer to Question 12
(a) Inventory (5 marks).
- Forward gain.
(₦100 − ₦92) × 200 = ₦1,600. - Dr derivative ₦1,600; Cr profit or loss ₦1,600. (2)
- Inventory loss on the hedged risk = ₦1,600.
- Dr profit or loss ₦1,600; Cr inventory ₦1,600. (2)
- Carrying amount.
200 × ₦60 = ₦12,000 − ₦1,600 = ₦10,400. (1)
(b) Cash flow hedge (7 marks).
- First year end.
effective portion = lower of ₦4,000,000 and ₦3,600,000 = ₦3,600,000 in other comprehensive income. (2) - Ineffective ₦400,000 in profit or loss. (1)
- Settlement.
cumulative reserve = lower of ₦5,000,000 and ₦4,200,000 = ₦4,200,000, so a further ₦600,000 in other comprehensive income. (2) - Further ineffectiveness.
(5,000,000 − 4,000,000) − 600,000 = ₦400,000 in profit or loss, total ₦800,000. (1) - On the sale, reclassify ₦4,200,000 from the reserve to profit or loss (revenue). (1)
(c) Net investment (4 marks).
- Translation loss on the net investment.
GHS 5m × (₦100 − ₦90) = ₦50m in other comprehensive income. (1.5) - Exchange gain on the borrowing = ₦50m, in other comprehensive income as the effective hedge, so the net is nil. (1.5)
- On disposal both reserves are reclassified to profit or loss. (1)
(d) Discontinuation and rebalancing (4 marks). Voluntary discontinuation is not allowed. It ends only if the instrument expires, is sold, terminated or exercised, the criteria are no longer met, or the objective changes. (2) Rebalancing adjusts the hedge ratio prospectively without ending the relationship. (1) If a cash flow hedge ends, the reserve stays until the transaction occurs, or is reclassified at once if it is no longer expected. (1)
Show the model answer to Question 13
(a) Purchase entries (4 marks).
- Forward gain at purchase.
(₦430 − ₦400) × 20,000 = ₦600,000, held in the reserve. (1) - Dr machine ₦8,600,000 ($20,000 × ₦430); Cr cash ₦8,600,000. (1)
- Basis adjustment: Dr reserve ₦600,000; Cr machine ₦600,000. (1)
- Cost = ₦8,000,000 ($20,000 at ₦400). (1)
(b) Depreciation (2 marks). ₦8,000,000 ÷ 10 = ₦800,000. (2)
(c) Why adjust cost (2 marks). The hedged item is a non-financial asset, so the reserve is added to or deducted from its cost. (1) The effect then reaches profit or loss through depreciation, matching the asset. (1)
(d) Purchase no longer expected (2 marks). The reserve is reclassified to profit or loss immediately. (2)
Pathfinder on IFRS 9 hedge accounting
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
We found no hedge accounting question in the November 2025 or May 2026 Pathfinders. Foreign currency items appear in November 2025 Question 1, but only for translation. Worked examples 1 to 6 show the layouts to use. Note: some ICAN practice examples on this topic are slightly different from ours, as shown in the notes after worked examples 1, 2 and 6.
Revise first: Worked examples
Questions usually ask for the type, the journals and where the amounts go. See the table of types.
Revise first: The three types of hedge
Source: ICAN Pathfinder, Strategic Business Reporting. Diets covered: No hedge accounting question identified in the November Diet, 2025 or May Diet, 2026 Pathfinders.
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