IAS 39:

Derivatives
and Hedging
REI MARIAN D. LEYNES
IAS 39: Derivative
I. Its value changes in response to changes in the so called ‘underlying’ or
other variables
II. It requires no initial net investment
III. It settled at a future ate - Stock price
- interest rate
- exchange rate
- Commodity price
Types of Derivatives
1. Forward (future ) Contract- a contract that gives the holder the obligation to buy or sell an
asset at a set price at a future date

2. Option Contract- a contract that gives the holder the right but not the obligation to buy or sell
an asset at a set price at a future date

- Call Option - to buy

- Put Option - to sell

3. Swap Agreement- a contract between two parties to exchange payments in the future
Measurement of Derivatives
All derivatives are measured at FAIR VALUE
Uses of Derivatives
➢ For speculation
➢ For Hedging
Hedging
▪ Risk management strategy employed
to offset losses in investments by
taking an opposite position in a
related asset. Hedge item
▪ Its objective is to reduce potential Hedging
loss arising from transaction Relationship
exposure Hedging
Instrument
Hedge Item
Defined as:

✓ Recognized asset

✓ Firm Commitment

✓ Highly probable forecasted transaction

✓ Net Investment in foreign operation

That exposes the entity to risk of changes in fair value or future cash flows and is designated as
being hedge.
Hedging Instrument
❑ As designated derivatives or non derivatives financial asset or liability whose fair value or
cash flows are expected to offset changes in the fair value or cash flows of a designated
hedge item

• Forward (future) Contracts

• Option Contracts

• Swap Agreements
 Hedging Relationship
Hedge Item Hedging Instrument
Sells goods for $5,000, payment Enters into a forward contract to sell
expected in 9 months $5,000 for P50 Peso/Dollar in 9 months

US Customer Filipino Producer

Types of Hedging Relationship

Fair Value Hedge Cash Flow Hedge

•hedge of the •hedge of the

exposure to exposure to
changes in fair variability in cash
value flows
• Profit or Loss • Deferred- OCI
Qualifications of Hedged Items
Hedge Items Fair Value Hedge Cash Flow Hedge

Recognized asset or liability

Firm Commitment

Highly Probable forecasted

transaction
Net Investment in foreign operation
Hedging

Fair Value Cash Flow

Hedge Hedge
Hedging
P&L OCI
Instrument
Normal
Hedged Items P&L Accounting
 Illustration 1: Hedging Exposed Net
Liability Position

On December 1, 2020, ABC Co.

purchase from Thailand frim an Hedged Item Hedging Instrument
inventory costing 10,000 baht.
Payment is due on January 15,
2021. also on December 1, ABC
Co. entered into a foreign
exchange forward to buy 10,000
baht on January 15, 2021.
 Possible Questions
1. What is the fair value of the forward contract on December 1, 2020? Zero.

2. How much is the gain or loss to be recognized with respect to the hedge P 1,200.00 Loss
item on December 31, 2020?

3. How much is the gain or loss to be recognized with respect to the hedging P 700.00 Gain
instrument on December 31, 2020?

4. How much is the gain or loss to be recognized with respect to the hedge P 200.00 Gain
item on January 15, 2021

5. How much is the gain or loss to be recognized with respect to the hedging P 300.00 Loss
instrument on January 15, 2021?

6. What is the fair value of the forward contract on January 15, 2021? P 400.00 Asset
7. What is the impact on the company’s income in 2021 as a result of this
hedge?
P 100.00 Loss

8. How much peso will it cost the company to finally pay the account on P 13,600.00
January 15, 2021?
 Illustration 2: Hedging Exposed Net
Asset Position

On December 1, 2020, ABC Co.

sold from Thailand frim an Hedged Item Hedging Instrument
inventory costing 10,000 baht.
Payment is due on January 15,
2021. also on December 1, ABC
Co. entered into a foreign
exchange forward to sell 10,000
baht on January 15, 2021.
 Possible Questions
1. What is the fair value of the forward contract on December 1, 2020? Zero.

2. How much is the gain or loss to be recognized with respect to the hedge P 1,200.00 Gain
item on December 31, 2020?

3. How much is the gain or loss to be recognized with respect to the hedging P 700.00 Loss
instrument on December 31, 2020?

4. How much is the gain or loss to be recognized with respect to the hedge P 200.00 Loss
item on January 15, 2021

5. How much is the gain or loss to be recognized with respect to the hedging P 300.00 Gain
instrument on January 15, 2021?

6. What is the fair value of the forward contract on January 15, 2021? P 400.00 Liability
7. What is the impact on the company’s income in 2021 as a result of this
hedge?
P 100.00 Gain

8. How much peso did the company ultimately realized from exporting P 13,600.00
transaction?
Firm Commitment
❑ A binding agreement to purchase or sell an asset at a set price on a future
date
❑ When an unrecognized firm commitment is designated as a hedge item,
the subsequent cumulative change in the fair value of the firm commitment
is recognized as an asset or liability with a corresponding gain or loss
recognized inn profit or loss
❑ The initial carrying amount of the asset or liability that arises from a firm
commitment is adjusted to include the cumulative change in the fair value
of the firm commitment
Illustration 3:Firm Commitment
 Possible Questions
1. How much is the gain or loss to be recognized with respect to the P 1,200.00 Gain
hedging instrument on December 31, 2020?

2. How much is the gain or loss to be recognized with respect to the P 1,200.00 Loss
hedging item on December 31, 2020?

3. What is the firm commitment balance on December 31, 2020? P 1,200.00 Liability

4. How much is the gain or loss to be recognized with respect to the P 1,200.00 Gain
hedging instrument on January 14, 2021?

5. How much is the gain or loss to be recognized with respect to the P 1,200.00 Loss
hedging item on January 14, 2021?
Zero
6. What is the impact on the company’s income in 2021 as a result of
this hedge?

7. What amount shall be recognized as purchases n January 14, 2021? P 49,600.00 ($20,000 xP2.48)
 Illustration 4 : Forward Contract
The following data apply to Alpha Company’s purchase of Questions:
45,400 yen under a forward contract dated November 2, a. In its income statement for the year end
2019, for delivery on January 31, 2020 2019, what amount of gain or loss should Alpha
Nov 2, 2019 Dec 31, 2019 Jan 31, 2020 report from this forward contract?
Spot Rates P 55.75 P 53.90 P 54.50
30 day Forward rate P 51.30 P 56.15 P 53.20
60 day Forward rate P 57.65 P 52.30 P 55.75
90 day Forward rate P 54.25 P 55.45 P 52.10 (54.25-56.15) x 45,400= 86,260 GAIN
 Illustration 4: Forward Contract
The following data apply to Alpha Company’s purchase of Questions:
45,400 yen under a forward contract dated November 2, b. In its income statement for the year end 2020,
2019, for delivery on January 31, 2020 what amount of gain or loss should Alpha report
Nov 2, 2019 Dec 31, 2019 Jan 31, 2020 from this forward contract?
Spot Rates P 55.75 P 53.90 P 54.50
30 day Forward rate P 51.30 P 56.15 P 53.20
60 day Forward rate P 57.65 P 52.30 P 55.75 (56.15-54.5) x 45,400= 74,910 LOSS
90 day Forward rate P 54.25 P 55.45 P 52.10
 Illustration 5: Future Contract
Beta Company sold Merchandise for 111,200 US dollars
to a customer in France on November 2, 2019. Collection a. What amount will affect profit or loss
in US dollars was due on January 31, 2020. On the same regarding the hedge item on the financial
date, to hedge this foreign currency exposure, Beta statement in the date 2019?
Company entered into a future contract to sell 111,200
US dollars to BPI for delivery on January 31, 2020. (81.9-80.7) x 111,200= 133,440 LOSS
Exchange rates for the US dollars on different dates are
as follows b. What amount will affect profit or loss regarding
Nov 2, 2019 Dec 31, Jan 31, 2020
the hedging instrument on the financial statement
2019 in the date 2020?
Spot Rates 81.9 80.7 80.1
30 day futures 82.3 80.4 83.9
60 day futures 81.8 80.3 82.6 (80.4-80.1) x 111,200= 33,360 GAIN
90 day futures 80.6 81.6 83.4
120 day futures 80.1 81.4 82.8
 Illustration 5: Future Contract
Beta Company sold Merchandise for 111,200 US dollars
to a customer in France on November 2, 2019. Collection c. As a result of foregoing transactions, what
in US dollars was due on January 31, 2020. On the same
amount will affect current earnings on the
date, to hedge this foreign currency exposure, Beta
Company entered into a future contract to sell 111,200 settlement date in 2020?
US dollars to BPI for delivery on January 31, 2020.
Exchange rates for the US dollars on different dates are Hedging Instrument 33,360 gain
as follows
Hedge Item (AR) 66,720 loss
Nov 2, 2019 Dec 31, 2019 Jan 31, 2020 (80.7-80.1) x 111,200
Spot Rates 81.9 80.7 80.1
30 day Forward Contract 82.3 80.4 83.9
33,360 loss
60 day Forward Contract 81.8 80.3 82.6
90 day Forward Contract 80.6 81.6 83.4
120 day Forward Contract 80.1 81.4 82.8
Your best quote that reflects your
approach… “It’s one small step for
man, one giant leap for mankind.”

- NEIL ARMSTRONG