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portion of the fair value movement on the hedging instrument is recorded immediately in
P&L.
The ineffective part includes specific components excluded, as documented in the entitys
risk management strategy, from the assessment of hedge effectiveness (e.g., the time value of
an option). Other common sources of ineffectiveness for a cash flow hedge are (i) structured
derivative features embedded in the hedging instrument, (ii) changes in timing of the highly
probable forecast transaction and (iii) differences between the risk being hedged and the
underlying of the hedging instrument.
When ineffectiveness is present, the amount of gains or losses on the hedging instrument that
can be deferred in the accumulated reserve is limited to the lesser of either the cumulative
change from the inception of the hedge in the fair value of the actual hedging instrument or
the cumulative change from the inception of the hedge in the fair value of the hedged item.
This gain or loss deferred in equity is reclassified, or recycled, to P&L in the same period
or periods the hedged item affects P&L, therefore offsetting to the extent that the hedge is
effective (see Figure 1.3). For example:
if the hedged item is a variable rate borrowing, the reclassification to P&L is recognised in
P&L within finance costs;
if the hedged item is an export sale, the reclassification to P&L is recognised in the P&L
statement within sales;
if the hedged item is a forecast transaction that will result in the recognition of a non-financial
asset or non-financial liability (e.g., a raw purchase material, or a purchase of inventory), the
Effective Part
Hedging
Hedging Instrument
Instrument
Changes
Changes in
in fair
fair value
value
Ineffective Part
Equity
When hedged
item impacts P&L
P&L