As a hypothetical example, a non-financial company wants to fix the interest on a floating-rate loan of 1 billion yen. It enters into an interest rate swap with a notional amount of 1 billion yen, paying a fixed rate of 1.5% and receiving the floating rate. The floating rate is 1.0% in year 1 and 2.0% in year 2. The company applies hedge accounting as a cash flow hedge under IFRS 9. Ignoring discounting, tax, and the ineffective portion, what is the profit or loss in year 1 and year 2?
Quiz: Hedge Accounting
Last reviewed: October 3, 2026
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5 questions to check your understanding of the chapter “Hedge Accounting”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.
Question 1
Answer and explanation
Answer: B
With hedge accounting, the change in the swap's fair value is held in other comprehensive income until the interest on the loan reaches profit or loss. Only the loan interest and the swap settlement enter profit or loss.
In year 1, the loan interest is 1.0% × 1 billion yen = 10 million yen. The company pays 1.5% and receives 1.0% on the swap, so it pays the difference of 5 million yen. Together, that is −10 million yen + (−5 million yen) = −15 million yen.
In year 2, the loan interest is 2.0% × 1 billion yen = 20 million yen. The company pays 1.5% and receives 2.0% on the swap, so it receives the difference of 5 million yen. Together, that is −20 million yen + 5 million yen = −15 million yen. In both years, the cost is the fixed rate of 1.5% × 1 billion yen = 15 million yen.
Showing −10 million yen in both years applies the year 1 floating rate to year 2 as well.
Without hedge accounting, if the change in the swap's fair value also goes to profit or loss, the result is −10 million yen in year 1 and −20 million yen in year 2, following the floating rate. The −5 million yen and +5 million yen are only the amounts of the swap settlement. The total over the 2 years is −30 million yen under either treatment. What hedge accounting changes is how the result appears period by period.
Learn more: Hedge Accounting Basics
Question 2
In a cash flow hedge under IFRS 9, when hedge accounting ends, which of the following correctly describes the treatment of the amount accumulated in other comprehensive income?
Answer and explanation
Answer: C
The treatment of the accumulated amount depends not on when the hedging instrument ended, but on whether the future cash flows of the hedged item are still expected to occur.
If they are still expected to occur, the amount is left in other comprehensive income until the cash flows occur. If they are no longer expected to occur, the amount is reclassified to profit or loss immediately. Hedge accounting ends prospectively, and nothing is restated back to the period in which it began.
Learn more: Hedge Accounting Basics
Question 3
Suppose that, under Japanese GAAP, a company hedges the purchase of inventory as a forecast transaction and applies deferral hedge accounting. Consider the practical guidelines last revised in 2019 (Accounting Systems Committee Statement No. 14, in the version before its abolition in July 2024). When the forecast transaction is carried out, how does the company treat the deferred hedge gains or losses that had been recorded in net assets under deferral hedge accounting?
Answer and explanation
Answer: A
The timing at which the deferred hedge gains or losses return to profit or loss is decided by the hedged item. When the purchase of inventory or property, plant and equipment is hedged as a forecast transaction, the deferred hedge gains or losses are added to or deducted from the acquisition cost of the asset when the transaction is carried out. As a result, the amount reaches profit or loss in the period in which that asset becomes an expense.
Recognizing it in net profit or loss for the current period when the transaction is carried out is the treatment for forecast transactions whose profit or loss appears right away, such as sales and interest. Keeping it in net assets and allocating it to each period is the treatment when the forecast transaction is the incurrence of an interest-bearing liability, such as a bond or a loan.
Learn more: Deferral Hedge Accounting under Japanese GAAP
Question 4
Consider the practical guidelines last revised in 2019 (Accounting Systems Committee Statement No. 14, in the version before its abolition in July 2024). Hedge accounting under Japanese GAAP judges effectiveness by comparing the cumulative changes in the hedged item and the hedging instrument from the start of the hedge to the date of assessment. Within what range of the ratio of these changes is a high correlation recognized?
Answer and explanation
Answer: D
In the effectiveness judgment, a high correlation is recognized if the ratio of the changes is within roughly 80% to 125%.
For example, if the loss on the hedging instrument is 80 and the gain on the hedged item is 100, the ratio is 80 ÷ 100 = 80%. If the gain on the hedging instrument is 100 and the loss on the hedged item is 80, the ratio is 100 ÷ 80 = 125%. Both are at the ends of the range and are within it.
The company also performs this evaluation throughout the designated hedge period: on every closing date and at least roughly every six months. An evaluation at the start alone is not enough.
Learn more: Deferral Hedge Accounting under Japanese GAAP
Question 5
As a hypothetical example, a company buys a call option for 8 million yen to prepare for a purchase of raw materials, and the whole amount is time value. Under an IFRS 9 cash flow hedge, it designates only the change in intrinsic value of the option as the hedging instrument, and the hedged item is transaction related. When the raw materials are purchased, the intrinsic value is 3 million yen and the time value is 0. Ignoring the ineffective portion, discounting, and tax, by how much does the adjustment change the acquisition cost, on a net basis?
Answer and explanation
Answer: C
The change in time value is 0 − 8 million yen = −8 million yen in total. When the hedged item is transaction related, this change is recorded in other comprehensive income and added to the acquisition cost when the raw materials are purchased. The acquisition cost increases by 8 million yen.
The change in intrinsic value is +3 million yen, from 0 to 3 million yen. It was also recorded in other comprehensive income, so it is deducted from the acquisition cost at the purchase. The net result is +8 million yen − 3 million yen = +5 million yen, so the acquisition cost increases by 5 million yen.
The answer of an 8 million yen increase does not deduct the intrinsic value part. The answer of a 3 million yen decrease does not add the time value part. The answer of an 11 million yen increase adds the intrinsic value part instead of deducting it.
Learn more: Hedge Accounting under IFRS 9 and ASC 815