1. (a) What is hedge accounting?

(b) When are reporting entities allowed to apply hedge accounting principles in

accordance with the requirements of AASB 9?

(c) Identify the three types of hedges specified in AASB 9.

(d) Briefly explain the accounting requirements of AASB 9 in relation to fair value hedges

and cash flow hedges.

2. AASB 9 refers to the ‘hedged item’ and the ‘hedging instrument’. What is meant by

these terms? Provide an example of each using a foreign currency transaction. (LO6)

3. Megatron Ltd has a loan commitment of US$230 000 that is payable in six months’ time.

The management of Megatron is concerned about adverse exchange rate movements

and wishes to hedge this loan. As a result, Megatron enters into a forward rate agreement

to purchase US$230 000 in six months’ time.

Required

In accordance with the requirements of AASB 9, should the hedging arrangement be

treated as:

(a) a fair value hedge of the US dollar loan commitment with gains and losses on

remeasuring the loan commitment and the forward rate agreement at year-end

recognised in profit or loss? or

(b) a cash flow hedge of the amount of the commitment to be settled in the future with

gains and losses on remeasuring the forward rate agreement recognised in equity?