Document ID: chunk:federal_register_of_legislation:F2021C00192:body:0:p43
Version: federal_register_of_legislation:F2021C00192
Segment Type: other
Provision Reference: 
Character Range: 107294–111381

January 20X1, Entity A designates as the hedged item an amount of CU20 million of assets in the three-month time period. It designates as the hedged risk the change in the value of the hedged item (ie the CU20 million of assets) that is attributable to changes in LIBOR. It also complies with the other designation requirements set out in paragraphs 88(d) and AG119 of the Standard.
IE10 Entity A designates as the hedging instrument the interest rate swap described in paragraph IE4.
 End of month 1 (31 January 20X1)
IE11 On 31 January 20X1 (at the end of month 1) when Entity A tests effectiveness, LIBOR has decreased. Based on historical prepayment experience, Entity A estimates that, as a consequence, prepayments will occur faster than previously estimated. As a result it re-estimates the amount of assets scheduled into this time period (excluding new assets originated during the month) as CU96 million.
IE12 The fair value of the designated interest rate swap with a notional principal of CU20 million is (CU47,408)[11] (the swap is a liability).
IE13 Entity A computes the change in the fair value of the hedged item, taking into account the change in estimated prepayments, as follows.
(a) First, it calculates the percentage of the initial estimate of the assets in the time period that was hedged. This is 20 per cent (CU20 million ÷ CU100 million).
(b) Second, it applies this percentage (20 per cent) to its revised estimate of the amount in that time period (CU96 million) to calculate the amount that is the hedged item based on its revised estimate. This is CU19.2 million.
(c) Third, it calculates the change in the fair value of this revised estimate of the hedged item (CU19.2 million) that is attributable to changes in LIBOR. This is CU45,511 (CU47,408[12] × (CU19.2 million ÷ CU20 million)).
IE14 Entity A makes the following accounting entries relating to this time period:

Dr                                                                                                    Cash                                                       CU172,097
                                                                                                      Cr                                                         Profit or loss (interest income)(a)     CU172,097
To recognise the interest received on the hedged amount (CU19.2 million).
Dr                                                                                                    Profit or loss (interest expense)                          CU179,268
                                                                                                      Cr                                                         Profit or loss (interest income)        CU179,268
                                                                                                      Cr                                                         Cash                                    Nil
To recognise the interest received and paid on the swap designated as the hedging instrument.
Dr                                                                                                    Profit or loss (loss)                                      CU47,408
                                                                                                      Cr                                                         Derivative liability                    CU47,408
To recognise the change in the fair value of the swap.
Dr                                                                                                    Separate line item in the statement of financial position  CU45,511
                                                                                                      Cr                                                         Profit or loss (gain)                   CU45,511
To recognise the change in the fair value of the hedged amount.
  (a) This example does not show how amounts of interest income and interest expense are calculated.

IE15 The net result on profit or loss (excluding interest income