ASBE No. 24
Active
Hedging (Hedge Accounting)
Hedging (Hedge Accounting) is part of the Chinese Accounting Standards for Business Enterprises (ASBE).
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Conceptual Framework Linkage
Aligning the accounting for a hedging relationship with its risk management purpose
ASBE No. 24 governs HEDGE ACCOUNTING – a SPECIAL set of RULES permitting the RECOGNITION of GAINS and LOSSES on a HEDGING instrument and a HEDGED item TOGETHER, in the SAME period, WHERE a QUALIFYING hedging RELATIONSHIP exists. The Standard is BROADLY converged with IFRS 9'S OWN (post-2013) principles-BASED hedge accounting MODEL internationally.
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Scope – Three Hedge Types
Fair value, cash flow, and net investment hedges
Hedge typeExposure being hedged
Fair value hedgeEXPOSURE to CHANGES in the FAIR value of a RECOGNISED asset, LIABILITY, or FIRM commitment
Cash flow hedgeEXPOSURE to VARIABILITY in CASH flows FROM a RECOGNISED asset/liability or a HIGHLY probable FORECAST transaction
Net investment hedgeEXPOSURE to FOREIGN currency RISK on a NET investment in a FOREIGN operation
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Fair Value Hedges
Both the hedged item and the hedging instrument adjusted through profit or loss
IN a FAIR VALUE hedge, the GAIN or LOSS on the HEDGING instrument is RECOGNISED in PROFIT or LOSS, WITH the CARRYING amount of the HEDGED item ALSO adjusted for the GAIN or LOSS ATTRIBUTABLE to the HEDGED risk, ALSO recognised in PROFIT or loss – the TWO offsetting EACH other to the EXTENT the HEDGE is EFFECTIVE.
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Cash Flow Hedges
Effective portion in OCI, ineffective portion to profit or loss
IN a CASH flow hedge, the EFFECTIVE portion of the GAIN or LOSS on the HEDGING instrument is RECOGNISED WITHIN OTHER comprehensive INCOME, WHILE the INEFFECTIVE portion is RECOGNISED immediately in PROFIT or loss – the ACCUMULATED amount WITHIN OCI is SUBSEQUENTLY reclassified to PROFIT or loss WHEN the HEDGED forecast TRANSACTION affects PROFIT or loss.
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Net Investment Hedges in Foreign Operations
Accounted for similarly to cash flow hedges
A HEDGE of a NET investment in a FOREIGN operation is ACCOUNTED for SIMILARLY to a CASH flow hedge – the EFFECTIVE portion RECOGNISED WITHIN other COMPREHENSIVE income, RECLASSIFIED to PROFIT or loss ON disposal of the FOREIGN operation (see the COMPANION ASBE No. 19 poster).
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Hedge Effectiveness – a Principles-Based Approach
An economic relationship, not a rigid quantitative band
A HEDGING relationship QUALIFIES for HEDGE accounting WHERE THERE is an ECONOMIC relationship BETWEEN the HEDGED item and the HEDGING instrument, CREDIT risk does NOT DOMINATE the VALUE changes RESULTING from that ECONOMIC relationship, and the HEDGE RATIO is CONSISTENT with the ENTITY'S actual RISK management STRATEGY.
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Ending the Old Bright-Line 80–125% Testing
A more flexible, judgement-based effectiveness assessment
THIS principles-BASED effectiveness TEST replaced an OLDER, more RIGID quantitative APPROACH – REQUIRING a HEDGE'S actual EFFECTIVENESS to fall WITHIN a SPECIFIC numerical BAND (COMMONLY 80%–125%) EACH period – a RETROSPECTIVE, bright-LINE test that OFTEN failed ECONOMICALLY sound HEDGES on TECHNICAL grounds. The CURRENT, more FLEXIBLE approach MIRRORS IFRS 9'S own 2013-era REFORM of hedge ACCOUNTING internationally.
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Worked Example – a Cash Flow Hedge of Forecast Purchases
Deferring the effective portion within OCI
Example: Hedging a highly probable foreign currency purchase
A company enters a forward contract to hedge a highly probable USD 5,000,000 purchase of raw materials expected in 6 months. At the reporting date, the forward contract shows a gain of RMB 300,000, assessed as fully effective.
The company recognises the RMB 300,000 gain WITHIN OTHER comprehensive INCOME – NOT profit or LOSS – DEFERRING it until the HEDGED forecast PURCHASE actually OCCURS and AFFECTS profit or LOSS.
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Worked Example – a Fair Value Hedge of a Fixed-Rate Loan
Offsetting gains and losses within the same period's profit or loss
Example: Swapping fixed-rate exposure to floating
A company issues a fixed-rate loan and enters an interest rate swap to hedge against fair value changes due to interest rate movements. During the period, the swap gains RMB 400,000 in fair value, while the loan's fair value (attributable to interest rate risk) falls by RMB 380,000.
The company recognises the RMB 400,000 SWAP gain and the RMB 380,000 LOAN fair value LOSS BOTH in PROFIT or loss FOR the SAME period, LARGELY offsetting EACH other, REFLECTING the HEDGE'S effectiveness.
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Disclosure Requirements
What ASBE No. 24 requires
Risk management strategy and objectives for undertaking hedgesAmounts recognised in profit or loss and other comprehensive income for each hedge typeHedge ineffectiveness recognised during the period
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Whether a genuine economic relationship exists between the hedged item and hedging instrumentWhether a forecast transaction is genuinely "highly probable" for cash flow hedge purposes
SIGNIFICANT ESTIMATES
Fair value of hedging instruments and the hedged risk component
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Relationship to IFRS 9
Comparison – ASBE 24 vs IFRS 9's hedge accounting model
FeatureASBE 24IFRS 9
Effectiveness testingPrinciples-based economic relationship testPrinciples-based economic relationship test – converged
Three hedge typesFair value, cash flow, net investmentFair value, cash flow, net investment – converged
A GENUINELY thoroughly CONVERGED standard – CHINA adopted the MORE flexible, PRINCIPLES-based hedge ACCOUNTING approach CLOSELY in step with IFRS 9'S own 2013-era REFORM.
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Statement Mapping
Where every hedge accounting event lands
EventStatement(s) affectedNotes
Fair value hedge gain/lossBS ISBoth hedging instrument and hedged item adjusted through profit or loss
Cash flow hedge effective portionSCOEDeferred in OCI until the hedged transaction affects profit or loss
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Related Standards
Cross-reference map
StandardConnection
ASBE No. 19Foreign Currency Translation – relevant for net investment hedges of foreign operations
ASBE No. 22Recognition and Measurement of Financial Instruments – supplies the classification of hedging instruments
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Quick-Reference Glossary
Hedge effectiveness
The extent to which changes in the fair value or cash flows of a hedging instrument offset changes in the hedged item, assessed through an economic-relationship test.
Hedge ratio
The relationship between the quantity of the hedging instrument and the quantity of the hedged item, required to be consistent with actual risk management strategy.
Financial statement key (Chinese GAAP / ASBE terminology)
BS Balance Sheet (资产负债表)
IS Income Statement (利润表)
SCOE Statement of Changes in Owners' Equity (所有者权益变动表)
CFS Cash Flow Statement (现金流量表)
History & Development
2006-02
ASBE No. 24 Hedging (Hedge Accounting) issued
Operative for periods beginning on or after 1 February 2007