AASB 139 - Financial Instruments: Recognition and Measurement - July 2004
End of month 1 (31 January 20x1)End of month 1 (31 January 20x1)
Start here
Get a plain-English read of End of month 1 (31 January 20x1)
Turn the raw legal text into a practical explanation grounded in AASB 139 - Financial Instruments: Recognition and Measurement - July 2004.
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)[3] (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[4] × (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)[5] 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.
IE15 The net result on profit or loss (excluding interest income and interest expense) is to recognise a loss of (CU1,897). This represents ineffectiveness in the hedging relationship that arises from the change in estimated prepayment dates.