Accounting for Derivatives: Advanced Hedging under IFRS 9, 2nd Edition

8.3 CASE STUDY: HEDGING A FLOATING RATE FOREIGN CURRENCY LIABILITY WITH A RECEIVE-FLOATING PAY-FIXED CROSS-CURRENCY SWAP

This case study illustrates the accounting treatment of a cash flow hedge of a floating rate foreign currency liability with a pay-fixed receive-floating CCS.

8.3.1 Background Information

On 15 July 20X0, ABC issued a USD-denominated floating rate bond. ABC's functional currency was the EUR. The bond had the following main terms:

Bond terms
Issue date	15 July 20X0
Maturity	3 years (15 July 20X3)
Notional	USD 100 million
Coupon	USD Libor 12M + 0.50% annually, actual/360 basis
USD Libor fixing	Libor is fixed 2 days prior to the beginning of each annual interest period

Since ABC's objective was to raise EUR fixed funding, on the issue date ABC entered into a CCS. Through the CCS, the entity agreed to receive a floating rate equal to the bond coupon and pay a EUR fixed amount. The CCS had the following terms:

Cross-currency swap terms
Trade date	15 July 20X0
Start date	15 July 20X0
Counterparties	ABC and XYZ Bank
Maturity	3 years (15 July 20X3)
USD nominal	USD 100 million
EUR nominal	EUR 80 million
Initial exchange	On start date, ABC receives the EUR nominal and pays the USD nominal
ABC pays	5.19% annually, actual/360 basis, on the EUR nominal
ABC receives	USD Libor 12M + 0.50 bps annually, actual/360 basis.Libor is fixed 2 days prior to the beginning of each annual interest period
Final exchange	On maturity date, ABC receives ...