PSAK 55

FINANCIAL INSTRUMENT:
RECOGNITION AND MEASUREMENT

GROUP 3
Jayson Nehemiah Indiarto
Sarah Amelia
Zahrina Fajrina
Nurmasyitah Mujadilah
Fika Anggi
 Table of content

1 Overview PSAK 55 and combination

2 Definition

3 Recognition, Measurement and Presentation

4 Illustration and Examples

2
 Standard Development
 PSAK 55 Financial Instrument: Recognition and Measuurement
adopted from IAS 39 Financial Instrumen: Recognition & Measurement

 In November 2009 the IASB issued IFRS 9 (2009),the first milestone in the
project to replace IAS 39
 In October 2010 the IASB published IFRS 9 (2010), to include guidance on
financial liabilities and derecognition of financial instruments.
 InMarch 2013,the IASB issued an exposure draft (ED) onlimited amendments
to IFRS 9 (2010),to address specific application questions raised by interested
parties as well as to try and reduce differences with the FASB. However, the
FASB tentatively decided that it would not continue to pursue a classification
and measurement model similar to the IASB. As a consequence, the FASB’s
classification and measurement project is expected to result in few changes to
current US GAAP.
 In November 2013,the IASBpublished the final hedging requirements
excluding macro hedging.
 In July 2014,the IASB published the new and complete version of IFRS 9
(hereafter ‘IFRS 9’ or ‘the new standard’),which includes the new hedge
accounting, impairment and classification and measurement requirements.
3
Effective 2018.
 Financial Instrument Classification
Financial Instrument Definition
Any contract which adds to the financial assets of the entity and
the financial liability or other equity instruments of the entity.
Financial Asset
Others entity The contract is settled
Contractual
Cash equity with the equity
Rights instrument of the entity.
instrument

Financial liability

Contract settled with equity

Contractual Obligation
instrument of the entity

Equity

Contract that entitles residual rights to the assets of an entity after

deducting all liabilities.

4
 Types of financial instruments
Financial Instrument

Financial Financial Equity Dervative Hedging

Assets Liability Instruments Instruments Instruments

Ordinary Ordinary
Financial assets Fair Value
Financial Equity Derivative
at fair value
through profit liabilities at fair Instrument
value through
profit
Investment Compound Dervative Casb Flow
held to Equity attached
maturity Instrument
Others Net
Loan and obligations investment in
account overseas
Synthesis
receivables operations
Equity
Instrument
Financial asset
for selling

5
Financial Instrument
 any contract that adds value :
► financial assets of the entity, and (on the other hand)
► financial liability or other equity instruments of the entity.
►Financial Asset
 Cash
 Equity instruments issued by other
entities
 Contractual rights:
 to receive cash or other financial
assets from other entities; or
 to exchange financial assets with
other entities with potentially
profitable conditions; or
• The contract will be settled by
issuing the equity instruments of
the entity
• Non-derivative
• Derivatives
►Financial Liabilities
 Contractual obligations :
 to transfer cash or other financial assets
to another entity; or
 to exchange financial assets or
financial liabilities with other entities
with conditions potentially unfavorable
to the entity;
 contracts which will or may be settled
by using the equity instruments issued
by the entity and constitute a:
 non derivative; or
 derivatives
6
PSAK 55 R – Financial instruments of recognition and
Measurement

► Financial instruments are measured at initial recognition at fair

value plus transaction costs except for instruments measured at fair
value.
► Derecognition of financial assets is based on a combination of "risk
and reward" and a control approach. Evaluation of risk and reward
is performed before evaluation of transfer control
► Acknowledgment of gain / loss on the elimination
(extinguishment) of financial liabilities when new debt is issued
has different terms (term) than the old debt.
► Debt restructuring that causes substantial modification of term can
result in gain / loss upon issuance of new liabilities.

7
 PSAK 55 R – Financial instruments of recognition and
Measurement
 Four categories of financial assets:
 Financial assets designated for fair value through profit or loss;
 Held-to-maturity investments;
 Loans or receivables; and
 Financial assets are available for sale.

 Two categories of financial liabilities

 Financial liabilities at fair value through profit or loss
 Other obligations
 Measurement of financial assets using fair value in a broad
sense
 Some differences in practice in identifying compound
derivatives.

8
 PSAK 55 R – Financial instruments of recognition and Measurement

 The market price of assets owned or liabilities to be

issued is the bid price and for the assets to be purchased
or the liabilities held are the asking price.
 Measurement of financial instruments amounting to
amortization, premium and discount dimartisasi by using
effective interest rate.
 Reclassification into or out of prohibited FVPL designed
for hedging purposes
 The rules of tainting on held to maturity investment,
restrictions for 2 years shall not transfer between
categories of investment.

9
 PSAK 55 R – Financial instruments of recognition and Measurement

 Objective evidence of impairment of financial assets and

valuations shall be made on each financial statement
date.
 Significant financial instruments individually
 Not significant or significant but not impaired
 Assessment of impairment is done individually and
collectively
 Reversal of a decrease in receivables, investments in
HTM and AFS debt instruments can be made if they meet
the criteria.

10
 Purpose

Set the basic principles of

recognition and measurement of
financial assets, financial
liabilities, and contracts of
purchase or sale of nonfinancial
items.

11
 Scope

 Applied by all entities to all types of financial instruments, except

for:
 Investments  subsidiaries, associations and joint ventures
(PSAK 65, 15 and 12 & 66)
 Rights and obligations set forth in the lease (PSAK 30)
 The rights and obligations of the employer (PSAK 24)
 Financial instruments of entities that meet the definition of equity
instruments
 Rights and obligations under an insurance contract (PSAK 62)
 Contract in the context of business combination (PSAK 22)
 Loan and provision commitments (PSAK 57)
 Stock-based compensation transactions (PSAK 52)

12
 Scope

The following loan commitments are included in the scope :

 the loan commitments provided by the entity as a financial liability
at fair value through profit or loss.
 loan commitments granted which can be settled on a net basis by
cash or by delivery / issuance of other financial instruments.
 commitment to provide loans granted at interest rates below market
interest rates.
Applied to a contract of purchase or sale of nonfinancial items which can
be settled on a net basis by cash or other financial instruments, or by
exchanging financial instruments,

13
 Definition of Derivatives

 Derivatives are a financial instrument or other contract with the

characteristics of:
 the value changes as a result of changes in the predetermined variable (often
referred to as the underlying variable), among others: interest rates, the price
of financial instruments, commodity prices, foreign exchange rates, price
indices or interest rate indices, credit ratings or credit indices , or other
variables.
 For nonfinancial variables, those variables are not related to the parties to
the contract;
 Does not require a net initial investment or require a net initial investment in a
smaller amount than the amount required for other similar contracts which
are expected to have a similar effect as a result of changes in market factors;
and
 completed on a certain date in the future.

14
Financial Assets / Liabilities at Fair Value through Statements
of Income

Traded:
 Obtained / held for sale / repurchase in the near future
(trading);
 Part of the portfolio of certain financial instruments that have a
profit-taking pattern in the short term; or
 is a derivative (except for derivatives designated as hedging
instruments and effective).

 Issued to be assessed at Fair Value through the Income

Statement

15
Held to Maturity Investment

Criteria:
• Non-derivative
financial assets; Except:
• Fixed / fixed  defined as an asset
payments; at a fair value
• Maturity has been set; through L / R;
• Entities have the  set as AFS;
intent and ability to meet the definition
have to maturity loans
 granted and receivables.

16
Loans Granted and Receivables

Except:

 intended for sale in the near

future (trading);
Criteria:
 Non-derivative  is set as the keu asset at the
financial assets; fair value of Mel L / R;

 Fixed / fixed  classified as AFS;

payments;
 borrowings / receivables
do not have quotes in whose initial investment will
active markets, not be recovered
substantially (except for the
decrease of quality), and
hrs. are classified as AFS.

17
 Financial Assets Available for Sale

Criteria:
Non-derivative financial assets;
Defined as AFS;
 Not classified as:
 loans / receivables,
 owned to maturity, or
 assessed at fair value through L / R.Aset

18
 Tainting

 An entity shall not classify its financial assets as held-

to-maturity investments, if in the current year or
within the previous two years, have sold or
reclassified held-to-maturity investments in an amount
more than an insignificant amount before falling
tempo
 Tainting
 Unless the sale or reclassification is made:
 Approaching the maturity or date of repurchase (for
example, less than three months before maturity)
 After the entity has substantially obtained the entire
principal amount of the financial asset on the payment
schedule or the entity has accrued expedited payments; or
 (Associated with certain events that are beyond the control
of the entity, not recurring, and can not be reasonably
anticipated by the entity.
 Initial Measurement

Financial Assets and Liabilities

Measured at fair value Not measured at fair value

through profit or loss through profit or loss

Fair value Fair value plus

Transaction Fees

(expense transaction fee) (transaction cost is capitalized)

21
 Definition of Fair Value - old

The value at which an asset may be exchanged or an

obligation is settled between the party who understands
and wishes to enter into an arm's length transaction

Not the value to be received or paid by the entity in a

forced transaction, forced liquidation, or sale due to
financial difficulties.
 Definition of Fair Value - new

 fair
fairvalue
valueasasthe
theprice
pricetotobe
bereceived
receivedto tosell
sellan
anasset
assetor
or
price
priceto
tobe
bepaid
paidto
totransfer
transferaaliability
liabilityin
inaaregular
regular
transaction
transactionbetween
betweenmarket
marketparticipants
participantson onthe
thedate
date
of
ofmeasurement.
measurement.

• "... the price that would be received to sell an asset or

transfer a liability in an orderly transaction between
market participants at the measurement date."
• IFRS 13 para 9

23
Measurement After Initial Recognition? Loans and
Receivables

a) Fair value
b) Amortized costs
c) Fees (limited use only if fair value can not be
determined)

 PSAK 55 classifies:
 4 categories of financial assets
 2 categories of financial liabilities
 The category specifies the method used for
further measurement

24
 Amortization Fee

Amount of initial
measurement
PLUS OR MINUS
Accumulated amortization
with effectiv interest method
MINUS
Payment

MINUS
Impairment

25
 Interest rates are effective

 The interest rate equates between the initial value of

the asset and the present value of future payments.
 The initial value of the financial asset includes
transaction costs and other costs related to the
acquisition / issuance of financial assets / liabilities
 The effective interest rate is not always the same as
the specified interest rate.
 An effective interest rate is used to calculate
premium amortization or discount

26
 Transaction fees and fees

 transaction fees / provisions represent costs incurred in

connection with a given credit credit
 loan given to the borrower at the nominal value of the loan,
but which is recorded by the lender are:
 loan principal
 Plus the costs borrowers directly incur
 Less provision (the cost borne by the credit recipient)

27
 General Terms - Impairment

 Financial assets or groups of financial assets are

impaired if:
 Carrying amount / amortized cost> Recoverable amount
 Evaluation of whether there is objective evidence of
impairment shall be made at each balance sheet date
 Where there is objective evidence of impairment,
an estimated recoverable amount should be made
and recognize impairment losses
 Decrease in Values - General Concepts

The receivables for each report should be evaluated whether there

is objective evidence that the financial asset is impaired

If there is objective evidence it will be recognized impairment loss

The objective evidence is the result of one or more events after an

adverse initial recognition and an impact on future cash flows

29
Decrease in Values - General Concepts

Significant financial difficulties of the borrower

Significant financial difficulties of the borrower

Contract violations such as delays in interest or

Contractpayments
principal violations such as delays in interest or
principal payments

The lender gives concessions due to the financial

The lender
difficulties gives concessions
experienced due to the financial
by the borrower
difficulties experienced by the borrower

The borrower is declared bankrupt by the court

The borrower is declared bankrupt by the court

The worsening economic conditions that cause the

The worsening
ability economic conditions that cause the
to pay down
ability to pay down

30
 Decrease in Values - General Concepts

the loss is measured based on the

the loss is between
difference measured based
the on the
carrying
there is objective difference between the carrying
there is objective amount of the receivable and the
evidence amount of the receivable and the
evidence present value of the estimated
present value
future of the
cash flowsestimated
future cash flows

The discount rate  the

The discount
effective interestraterate
 the
effectiveatinterest
prevailing the time rate
of
initial recognition of theof
prevailing at the time
initial recognition
asset of the
asset
The discount rate  the
Losses are recognized The discount
effective interestraterate
 the
Losses
in the are recognized
income effectiveatinterest rate
in the income prevailing the time of
statement initial recognition of theof
prevailing at the time
statement initial recognition of the
asset...
asset...
31
 Decrease in Values - General Concepts

Account receivable Trade pays proved unpaid

Account receivable Trade pays proved unpaid

eliminate all such

can not be paid receivables unless there is
a guarantee

paid but the

losses are recognized
payment time is
only for receivables that
longer than
are not collateralized
promised

32
Decrease in Values - General Concepts

Evaluate objective
evidence
individually

If there is
receivables are objective evidence
included in the  calculate future
collectible class of cash flows from
receivables accounts
receivable

If there is no The difference

objective evidence will be recognized
of individual as an impairment
receivables loss
33
 Impairment of Assets - Financial Assets Listed at Amortized Acquisition
Cost

 Includes investments in held-to-maturity categories as well

as loans and receivables
 Significant Individual Assets:
 The first time should be assessed individually
 If there is no evidence of impairment during individual appraisal-
should be assessed in the same group of credit risk characteristics
 Group Assessment:
 For insignificant assets and other assets
 Can not be evaluated individually
Impairment of Collective Value - Listed Financial Assets at Amortized Acquisition
Cost

The impairment of collective value of financial

assets carried at amortized cost includes:
 Group of similar financial assets that are not
individually significant; and
 Individually significant financial assets that
do not experience impairment based on
individual evaluations;
 Impairment of Collective Value - Financial Assets -
Acquisition Cost Amortized

 Total loss is measured as the difference

between the asset's carrying amount and the
present value estimated future cash flows
discounted at the original effective interest rate
of the asset
 The carrying amount of the asset is reduced,
either directly or by a backup post.
 The amount of the loss is recognized in the
income statement.
 Impairment of Collective Value - Financial Assets -
Acquisition Cost Amortized

 If, in the subsequent period, the amount of impairment

loss is reduced, then the impairment loss previously
recognized shall be recoverable.
 The recovery may not result in the asset's carrying
value exceeds its amortized cost prior to the
recognition of impairment at the date of the recovery.
 The amount of recoverable financial assets is
recognized in the statement of income.
 Impairment of Financial Assets Measured at Amortized
Cost

Procedures for assessing impairment (IAS 39: 63-65)

Test for impairment for
Financial Assets

Not Individually
Individually Significant
Significant

Individually Individually Collectively

Fail Pass Fail Pass

Collectively tested
with similar credit
risk

38
Impairment of AFS Financial Assets

Changes in fair value of AFS

taken to equity

Decline in fair value must be

determined

Objective evidence of
Decline in fair value
impairment

Cumulative loss in equity Previous

Acquisition Current fair impairment
transferred to income - -
cost value loss
statement

Debt instrument: Reversible

Equity instrument: Non reversible

39
 Derivatif

Financial instruments or other contracts with the

following characteristics:

The value changes as a result of changes in the underlying

variables (such as interest rates, prices, exchange rates,
etc.).

Without a net initial investment or a value less than the

value of a similar contract that gives the same effect on
changes in market factors.

Completed on a certain date in the future.

 Derivative Financial Instruments

A derivative is a financial instrument that meets the following three criteria:

Its value changes in

Requires little or no
response to a change in Settled at a future date
initial investment
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 entity’s usual purchase,
sale or usage requirements

41
 Derivative Characteristics
 Freestanding derivative
 For example option, forward contract, swap, future contract
 Embedded derivative
 Components of hybrid / combined instruments
 In it there is a major non derivative contract
 A portion of the cash comes from suitable instruments such as stand-
alone derivatives.
 Seemed fulfilled for a separate acknowledgment

Types of derivative instruments Underlying Used by

Option contracts Security price Producers, trading firms,
(call and put) financial institutions, and
speculators
Forward contract Foreign exchange Various companies
e.g. foreign exchange forward rate
contract
Future contracts Commodity prices Producers and consumers
e.g. commodity futures
Swaps Interest rate Financial institutions
 Derivatif Melekat
 Derivatif melekat merupakan komponen instrumen campuran atau
instrumen gabungan
 Entitas yang diharuskan untuk memisahkan derivatif melekat dari kontrak
utamanya, namun jika tidak dapat mengukur derivatif melekatnya secara
terpisah, maka keseluruhan kontrak yang digabungkan diperlakukan
sebagai aset/liabilitas keuangan yang dimiliki untuk diperdagangkan.
 Derivatif melekat harus dipisahkan dari kontrak utamanya dan dicatat sebagai
derivatif berdasarkan Pernyataan ini, jika dan hanya jika:
a. karakteristik ekonomi dan risiko dari derivatif melekat tidak berkaitan erat dengan
karakteristik ekonomi dan risiko dari kontrak utama (PA43 dan PA46);
b. instrumen terpisah yang memiliki persyaratan yang sama dengan derivatif melekat
memenuhi definisi sebagai derivatif; dan
c. instrumen campuran (instrumen yang digabungkan) tidak diukur pada nilai wajar
melalui laba rugi (dengan kata lain derivatif yang melekat pada aset keuangan atau
liabilitas keuangan yang diukur pada nilai wajar melalui laba rugi tidak dipisahkan).
 Jika derivatif melekat dipisahkan, maka kontrak utamanya harus dicatat
berdasarkan Pernyataan ini jika kontrak utamanya merupakan instrumen
keuangan, namun jika kontrak utamanya bukan merupakan instrumen keuangan,
maka harus dicatat berdasarkan Pernyataan lain yang sesuai.
 Derivative Financial Instruments

• Use of derivatives
1. Manage market risk
2. Reduce borrowing cost
3. Profit from trading or speculation

• Types of derivatives
1. Forward type derivatives such as forward contracts, future
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
44
 Pengertian Lindung Nilai
 Komitmen pasti adalah perjanjian yang mengikat untuk mempertukarkan sumber
daya dalam kuantitas tertentu pada tingkat harga tertentu dan pada tanggal
atau tanggal-tanggal tertentu di masa depan.
 Prakiraan transaksi adalah transaksi di masa depan yang belum mengikat
namun telah diantisipasi.
 Instrumen lindung nilai adalah:
a. derivatif yang telah ditetapkan untuk tujuan lindung nilai; atau
b. aset keuangan nonderivatif atau liabilitas keuangan nonderivatif yang telah ditetapkan
untuk tujuan lindung nilai (hanya untuk lindung nilai atas risiko perubahan nilai tukar
mata uang asing), yang nilai wajar atau arus kasnya diperkirakan dapat saling hapus
dengan perubahan nilai wajar atau arus kas dari item yang dilindung nilai (paragraf 79-
84 dan PA110-PA113).
 Item yang dilindung nilai adalah aset, liabilitas, komitmen pasti, prakiraan
transaksi yang sangat mungkin terjadi, atau investasi neto pada operasi di luar
negeri yang (a) menyebabkan entitas menghadapi risiko perubahan nilai wajar
atau arus kas masa depan, dan (b) ditetapkan sebagai item yang dilindung nilai
(paragraf 85-92 dan A114-PA124).
 Efektivitas lindung nilai adalah sejauh mana perubahan nilai wajar atau arus
kas dari item yang dilindung nilai yang diatribusikan pada risiko yang akan
dilindung nilai dapat saling hapus dengan perubahan nilai wajar atau arus kas
dari instrumen lindung nilai (PA128-PA139).
 Hedging characteristics
 The purpose of a hedge to reduce risk.
 Perfect Hedging: perfect hedging (100% effectiveness) eliminates
risk = in practice, the hedging is rare.
 Hedging aims to take a position to neutralize risk, so doing by
contracting in the opposite position.
1. Hedge sale (short), have assets and will ensure the sale price of the
asset. Will make a profit if Pt. (actual price on contract date) is lower
than the contract price. E.g. Contract 12,000, realization 11,500
2. Long-term hedging, committed to buy in the future so that hedging
contracts are carried out to ensure the purchase price. Will make a
profit if Pt (actual price on contract date) is higher than contract
price. Eg Contract 12,000, realization 12,700
 Why Hedging?
 Arguments on the need for hedging:
1. Has no special ability or expertise in predicting variables such as
interest rates, foreign exchange rates, and commodity prices.
2. The company can focus its main activities according to its special
abilities and expertise.

 Argument no need for hedging:

 Para pemegang saham dapat, (jika mereka mau), melindung nilai
dirinya sendiri.
 Mereka tidak membutuhkan perusahaan melakukannya untuk mereka.
 Argumen mengasumsikan bahwa: 1. Para pemegang saham
mempunyai banyak informasi tentang risiko yang dihadapi oleh
perusahaan, seperti manajemen perusahaan; 2. tidak ada biaya-biaya
komisi dan transaksi. 3. Pemegang saham dapat melakukan
perlindungan atas risiko melalui portfolio investasi.
 Lindung Nilai Akuntansi
 Lindung nilai untuk tujuan akuntansi, mendesain satu atau lebih
instumen lindung nilai sehingga perubahan nilai wajarnya saling
meniadakan, baik seluruh atau sebagian dengan perubahan nilai
wajar dari item yang dilindungi.
 Lindung nilai akuntansi mengakui pengaruh laba/rugi dari
perubahan nilai wajar instrumen lindung nilai dengan itema
yang dilindung nilai
 Hedging for accounting purposes, means designating one or
more hedging instruments so that their change in fair value is an
offset, in whole or in part, to the change in fair value or cash
flows of a hedged item.
 Hedge accounting is recognizing the offsetting effects on profit or
loss of changes in the fair values of the hedging instrument and
the hedged item.
Tujuan Akuntansi Hedging
 Qualifying Hedging Instruments
(IAS 39: 72 – 73)

• Instruments that qualify include:

– Designated derivatives (except written options)
– Embedded Derivatives
– Designated non-derivatives financial asset/ liability that hedge
foreign exchange risks only
• 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

Tan & Lee Chapter

©2009
9 50
 Qualifying Hedged Items
(IAS 39: 78 -79)

Qualify Do not qualify

• Financial assets and liabilities • Held-to-maturity instruments

with exposure to changes in fair (regardless of fixed rate or
value variable rate)

• Non-financial assets exposed to • Investment in an associated

foreign exchange or price risks company

• Firm commitment

• Highly probable forecast

transaction with exposures to
future cash flows

• Net investment in foreign entity

Tan & Lee Chapter

©2009
9 51
 Criteria for Hedge Accounting
(IAS 39: 88)

Conditions
Conditionsto
tobe
bemet
metfor
forhedge
hedgeaccounting
accountingto
toapply
apply

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

Tan & Lee Chapter

©2009
9 52
 Kriteria & Dokumentasi
 Kriteria
 Terdapat kebijakan tertulis, tujuan manajemen risiko & strategi
lindung nilai.
 Hubungan lindung nilai diharapkan efektif utk saling menghapuskan
perubahan nilai wajar.
 Dokumentasi
 Identifikasi hedged items vs hedging instruments.
 Sifat risiko yang dilindungi
 cara yang akan digunakan entitas untuk menilai efektivitas
instrumen lindung nilai tersebut dalam rangka saling hapus
eksposur yang berasal dari perubahan dalam nilai wajar item yang
dilindung nilai atau perubahan arus kas yang dapat diatribusikan
pada risiko yang dilindung nilai.
 Classification of Hedging Relationships

Causes Explanation
Hedge of “the exposure to changes in fair value of a
Fair value recognized asset or liability or an unrecognized firm
hedge commitment, or an identified portion of such asset,
liability or firm commitment, which is attributable to a
particular risk and could affect profit or loss” (IAS
39:86a)
Hedge of “the exposure to variability in cash flows that
Cash flow (i) is attributable to a particular risk associated with a
hedge recognized asset or liability (such as all or some future
interest payment on variable debt instrument )or a highly
probable future transaction, and
(ii) could affect profit or loss” (IAS 39:86b)

Hedge of a net Hedge of the foreign currency risk associated with a

investment in a foreign operation whose financial statements are required
foreign entity to be translated into the presentation currency of the
parent company
Tan & Lee Chapter
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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 Hedging Instruments
commitment)

Change in fair value Change in fair value

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

Balance sheet

Change in fair value adjusted Change in fair value adjusted

against carrying amount against carrying amount

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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 on an ongoing basis
• On inception, hedge effectiveness is assessed on
– Comparison of the principal or critical terms
– Historical analysis
– Correlation analysis

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 Hedge Effectiveness
• Efektifitas dihitung secara prospektif dan retrospektif
• Hasil aktual berada dalam kisaran 80 -125%
• Seluruh lindung nilai yang tidak efektif diakui dalam laporan L/R
(termasuk ketidakefektifan dalam kisaran 80 -125%

Hedge is ineffective
125%
Hedge
Hedgeisiseffective
effective
100%
Hedge
Hedgeisiseffective
effective
80%
Hedge is ineffective
 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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 Accounting for a Cash Flow Hedge

Cash flow hedges are applicable to the following:

Forecasted
transactions
involving Other
financial and transactions
Interest rate
non-financial which affect
swaps
assets/liabilities future
which will result cash flows
in cash inflow/
outflow

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 Hedge of a Net Investment in a Foreign Entity

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 FC1,200,000 at 5% interest taken to hedge foreign investment
 Foreign currency translation reserves showed $15,000 (credit balance)

31/12/200x4
 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 of a Net Investment in a Foreign Entity

Translation difference in foreign investment’s FS for 31/12/20x4

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

Journal entries for parent

31/12/20x3
Dr Cash …………………………….. 2,200,000
Cr Loan payable …………………... 2,200,000
The loan payable is designated as a hedge of the net investment:
FC1,200,000 x spot rate of $1.85

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 Hedge of a Net Investment in a Foreign Entity

31/12/20x4

Dr Interest expense ………………. 106,800

Cr Accrued interest ……………….. 106,800
Interest expense during the year at 5% x FC1,200,000 x $1.78

Dr Accrued interest ……………….. 106,800

Cr Cash …………………………….. 102,000
Taken to equity
Cr Exchange gain …………………. 4,800 to offset
Settlement of accrued interest at year-end translation loss

Dr Loan payable …………………... 180,000

Cr Foreign currency translation 180,000
reserves …………………………
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
Criteria for
has reached maturity Hedge designation
hedge accounting
date or is closed off or is revoked
is no longer met
terminated

Accounting treatment depends on type of hedge

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 Main References
 Intermediate Accounting
Kieso, Weygandt, Walfield, 13th edition, John Wiley

 Standar Akuntansi Keuangan

Dewan Standar Akuntansi Keuangan, IAI

 International Financial Reporting Standards – Certificate Learning

Material
The Institute of Chartered Accountants, England and Wales

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