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’s 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’s profit and loss,

a ‘proportionate amount’ of the aggregate credits and debits is brought into account.

Where part only of the contract matures, the proportionate amount (‘PA’) 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.