This guidance applies to periods of account beginning on or
after 1 January 2005
A “hedging relationship”, as defined in
Regulation 2(5) will exist where the hedging instrument is intended
to act as a hedge of variation in fair value or cash flows, as well
as where a hedge is designated.
A company’s intention in undertaking a financial
transaction is expressed through the intentions of its directors,
although in many cases decisions will be delegated to a lower level
of management. Particularly in large companies, the board of
directors (or the group board) is likely to have set out a detailed
policy on risk management. A company that has adopted IAS 32 and
IAS 39 (or the UK equivalents) and wishes to use hedge accounting
must have such documentation.
In the majority of cases, it will be clear that the company
has entered into a particular derivative contract (or liability)
with the intention of hedging a particular asset, liability or
forecast transaction. This will particularly be so where:
For example, a company issuing $100 million of fixed rate debt might at the same time enter into cross-currency swaps with total notional principal amount of $100 million, which have the effect of converting the debt into a sterling floating rate liability. It is clear in such circumstances that the company will have entered into the swaps with the intention of hedging the debt issue, even if no hedge is designated.
