CFM57250 - Derivative contracts: hedging: regulation 10: more than one cash flow
This guidance applies to periods of account starting on or after 1 January 2015 where the company has elected for regulation 7 or 8 to apply.
More than one cash flow being hedged
In some cases, a currency, commodity or debt contract may be used to hedge not just a single anticipated cash flow, but a series of such cash flows. The derivative used to hedge may be a multiple settlement derivative - in other words, there may be more than one occasion on which the company receives or pays money under the contract. Each such occasion can be regarded as a disposal or termination of part of the company鈥檚 rights and duties under the contract.
Regulation 10(5) provides that where
- only part of the contract terminates, without the company ceasing to be a party to the contract, or
- part only of the hedged item begins to be recognised in determining the company鈥檚 profit and loss,
a 鈥榩roportionate amount鈥� of the aggregate credits and debits is brought into account.
Where part only of the contract matures, the proportionate amount (鈥楶A鈥�) to be brought into account is given by:
- PA = whole of the aggregate x fair value of the part of the contract maturing/fair value of the whole of the contract
In any other case, it is given by:
- PA = whole of the aggregate x fair value of the part of the hedged item being recognised/fair value of the whole of the hedged item.
A similar approach should be adopted where the expenditure being hedged is tax-deductible and regulation 10(3) applies.