CFM96110 - Interest restriction: group-interest: derivative contracts: example 2 (designated fair value hedge)
TIOPA10/S420-S421
MN plc is the ultimate parent of worldwide group.
MN plc takes out an interest rate swap to hedge the fair value risks on a fixed rate bond. The swap is designated as a fair value hedge in the group accounts.
Consolidated financial statements: Interest and other financing costs:
| Interest on bond | £14m |
|---|---|
| Accrual of periodic payments on swap | £(4)m |
| Fair value movements on swap | £(3)m |
| Fair value adjustment on the bond | £3.5m |
| £10.5m |
The application of the Disregard Regulation to the group financial statements would be as follows:
- Regulation 9 would not apply. There is an interest rate contract that is hedging risks arising in respect of the interest cost on the bond (the hedged item). However, the fair value profits and losses in respect of the hedged item are recognised in the group accounts.
- The group will therefore have a net group-interest expense of £10.5m for the period.