Under in-substance defeasance accounting, the liability would be treated as having been extinguished. Under the draft proposal, however, the enterprise would not remove the liability from its balance sheet but, rather, would continue to report both the assets in the trust and the liability on its balance sheet. Hedge Accounting Hedging involves designating a derivative or other financial instrument whose value or cash flows are expected to move inversely and approximately proportionately with changes in the value or cash flows of an asset or liability, a firm commitment, or an uncommitted but probable future transaction to offset the change in the value or cash flows of the hedged item. Hedge accounting means recognising and measuring the hedging instrument and related item being hedged on symmetrical bases, so that offsetting gains and losses are reported in income in the same periods. Under the draft interim standard, hedge accounting would be permitted in certain circumstances, provided that the hedging relationship is clearly defined, measurable, and actually effective.
Guidance is provided on when a hedge is effective.
For a fair value hedge of an existing asset or liability using a derivative, any gain or loss on the hedging instrument and on the hedged item would be included in net profit or loss for the period. The carrying amount of the hedged item is adjusted even if that asset or liability is otherwise carried at cost. For a cash flow hedge of an existing asset or liability, a commitment, or an uncommitted forecasted transaction, the gain or loss on the hedging instrument is reported as a separate component of equity until the hedged transaction affects net profit or loss. The enterprise need not demonstrate an intent to hold originated loans and receivables to maturity, as E62 proposed. Under IAS 39, all financial assets and financial liabilities are recognised on the balance sheet, including all derivatives.