In accordance with the "Basic Standard for Enterprise Accounting Standards," the Ministry of Finance issued the revised Enterprise Accounting Standard No. 24 — Hedging, on 2017/3/29, effective from 2018/1/1.
1. Overview of Guidelines
Hedging refers to designating a financial instrument as a hedging tool to manage exposure arising from specific risks such as foreign exchange, interest rate, price, or credit risk. The objective is for changes in the fair value or cash flows of the hedging instrument to offset, in whole or in part, changes in the fair value or cash flows of the hedged item.
Three types of hedges
- • Fair value hedge: A hedge of the exposure to changes in fair value of a recognized asset or liability, an unrecognized firm commitment, or a portion of such items.
- • Cash flow hedge: Hedging against the risk of fluctuations in cash flows.
- • Net investment hedge in foreign operations: Hedging against foreign exchange risk associated with net investments in foreign operations.
II. Hedging Instruments and Hedged Items
Hedging Instrument
A hedging instrument is a financial instrument designated by an entity for hedging purposes, whose changes in fair value or cash flows are expected to offset changes in the fair value or cash flows of the hedged item. An entity may designate options, forward contracts, and swap contracts as hedging instruments.
Hedged item
A hedged item is an asset, liability, firm commitment, or highly probable forecasted transaction that exposes the entity to changes in fair value or cash flows and is designated as the hedged item. It must be reliably measurable. This includes recognized assets or liabilities, unrecognized firm commitments, and highly probable forecasted transactions.
3. Hedging Relationships and Hedge Effectiveness
Conditions for Applying Hedge Accounting
- • A hedging relationship consists solely of qualifying hedging instruments and hedged items.
- • At the inception of the hedge, the entity formally designates the hedging instrument and the hedged item and prepares formal written documentation regarding the hedging relationship, the entity's risk management objectives, and its hedging strategy.
- • The hedging relationship meets the requirements for hedge effectiveness
Revision Highlights
This revision expands the scope of hedge accounting, eliminates the quantitative effectiveness threshold of 80%–125%, and introduces more principle-based criteria for assessing hedge effectiveness, enabling hedge accounting to better reflect an entity's risk management activities.
Regulatory Document Attachment
CAS 24 — Hedging Accounting (Revised in 2017) (PDF)