Many entities are exposed to foreign exchange risk arising from purchases and sales of goods or services denominated in foreign currencies. Cash inflows and outflows occurring on forecast transactions in the same foreign currency are often economically hedged on a net basis. For example, consider an entity that has forecast foreign currency sales of FC100 and purchases of FC80, both in 6 months. It hedges the net exposure using a single foreign exchange forward contract to sell FC20 in 6 months.
Hedging of such a net position does not qualify for hedge accounting under IAS 39. However, hedge accounting could still be achieved by designating the foreign exchange forward contract as hedging FC20 of the FC100 forecast sales. By doing … Read more