Question 1Explain why FRS 39 doesnotallow the use of“basis adjustment”methodtodealwithcashflowhedgereserveiftheforecasttransaction results in the recognition of afinancial asset or afinancial liability?2
Question 1Basis Adjustment:the effective portion of gain/loss on the hedging instrument that waspreviously recognised in OCI (equity) to be included as part of the cost of asset/liabilityFRS 39:•“... an entity shall measure financial assets, including derivatives that are assets, at theirfairvalues”•“... an entity shall measure all financial liabilities atamortised costusing the effective interestmethod”Transferring the effective portion of gain/loss (cash flow hedge reserve) as part of the cost of thefinancial assets/liabilities willalter the values of the financial instruments, which may misleadinvestors. This is also in violation of FRS 39.3
has intentionally blurred sections.
Sign up to view the full version.
Question 2ABC Ltd•Enters into a hedge relationship on 1 Jan 20x8•Adopts 31 Dec accounting year end•Prepares quarterlyfinancial statements•Documentation: Effectiveness test (80-125%) using cumulative figures4