Derivative instruments are measured at fair value.
Derivatives not for hedging purposes are classified as financial instruments at fair value through profit and loss (FVTPL).
The classification of a derivative as a hedge must be formally documented and the degree of “effectiveness” of the hedge must be specified.
For accounting purposes hedging transactions are classified as:
- fair value hedges – where the effects of the hedge are recognized to the income statement;
- cash flow hedges – where the effective portion of the hedge is recognized directly to
shareholders’ equity while the non-effective part is recognized to income statement;
- hedges of a net investment in a foreign operation – where the effective portion of the hedge is recognized directly to shareholders’ equity while the non-effective part is recognized to the income statement.
Specifically, for instruments classified as cash flow hedges (interest rate swaps), gains and losses from marking them to market are posted directly to shareholders’ equity for the part which “effectively” hedges the risk for which it was entered into, while any “non-effective” part is recognized to the income statement.