Financial Instruments: Cash Flow Hedge Accounting of Forecast Intra-group Transactions

Date recorded:

IGC 137-13 had allowed an intra-group monetary item that is not eliminated in consolidation, and therefore is reported as an asset or liability in the group balance sheet, to be a hedged item. IGC 137-14 had allowed a forecast intra-group transaction also to be a hedged item. In revising IAS 39 in December 2003, the Board incorporated the provisions of IGC 137-13 but not those of 137-14. This apparent prohibition against using a forecast intra-group transaction as a hedged item is causing concerns in practice, and constituents have questioned whether the Board intended such a prohibition, which is a difference with US GAAP.

The Board acknowledged this concern. It noted, however, that a general principle in IAS 39 is that entities can obtain hedge accounting only for external transactions. The rationale for allowing an intra-group monetary balance to be a hedged item does not apply to a forecast transaction because such a transaction is not recognised in the group accounts at all. The Board intends to clarify, however, that a group may use a forecast external transaction as the hedged item at the group level. This clarification will be exposed in the forthcoming exposure draft on guarantees and credit insurance due out in June 2004.

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