What is Cash Flow Hedge?
A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk, such as a forecasted purchase or sale in foreign currency, and that could affect profit or loss. Under IFRS 9, the effective portion of gains and losses on the hedging instrument is recognized in other comprehensive income.
How It Works
- Document the hedged risk and the forecasted transaction.
- Recognize the effective portion of the hedging instrument’s gain or loss in OCI.
- Recognize the ineffective portion immediately in profit or loss.
- Reclassify the OCI balance to profit or loss when the hedged transaction affects earnings.
Saudi Context
Saudi airlines hedging future jet fuel purchases or USD-denominated lease payments typically designate the relationships as cash flow hedges.
Example
A forward contract that hedges a forecasted USD purchase in three months produces a SAR 2 million gain. Of that, SAR 1.9 million is effective and goes to OCI; SAR 0.1 million is ineffective and hits profit or loss.