Hedge accounting - IAS 39. Pls help.

[PR13RAK]

Hello friends,

Pls help - need to put together hedge documentation.

Background:
Company A issuing fixed coupon bond in foreign currency, let it be JPY. And planning to hedge currency risk with fix-to-fix JPYUSD swap. Basicaly Company A ceates synthetic USD bond.

Hedged item - liabilities in JPY.
Hedging instrument - Currency swap.

Risk - currency risk.

1. What type of hedge is this? Cash flow or Fair value?
2. Accounting implications: at each report date what goes were (OCI, P&L etc)?
3. How to do retrospective effectivness analysis?

Im not accountant myself, Im actually treasurer and I understan that it is 100% hedge, becauce principals swaped at the beggining and cash flows at each coupon dates are exchanged (these sums are set at the very begining of the swap) and principals exchanged back at the end. I understand that exchange movements and effect on liabilities are offset by gain on swap. But I dont understand how do I revalue hedge at reporting dates and how to document this.

Pls, pls help, very urgent

 

[Blaik@Reval]

Fix Fix CCIRS designation

Typically such hedges are designated as cashflow hedges of foreign currency risk assuming your functional currency is USD. This means all effective changes in fair value go to OCI however at each reporting period, the spot to spot movement in the principal of the CCIRS should be recycled back to P&L to offset the translation gains/losses on the underlying JPY debt.

You could use dollar offset or regression testing to test for effectiveness - I suggest applying a hypothetical derivative method in either case. Hope this helps - contact my colleagues in your local Reval office (Reval: Treasury and Risk Management Solution (TRM)) and they can walk you through it.