Cash Flow Hedge - Effectiveness and Ineffectiveness

Reading #22, Q#6, CFAI study text Page 313

Questions says (in statement 4 on page 313) that it is 94% effective so there is 6% ineffective as well.

Answer is option C, which is right because effective is going to Equity.

But I believe 6% should be reported to income statement as well.

I believe that you’re correct.

I believe 94 % effective means it is effective, I remember I read read some where that International Accounting Standard or IFRS is defining some percentage which is required to get hedge effective. So there are 2 options either it is effective of in effective.

If its change in value equals that of the item (fair value, cash flow, whatever) that you’re hedging, that portion is effective. If its change in value is more or less than that of the item that you’re hedging, the difference is ineffective. A hedge can be part effective and part ineffective; usually it is.

Ok, then what is the soilution of my question S2000magician? In this question there are 2 right answers.

I’d have to see the original CFA Institute text, which I don’t have. Alas.

Take your time but I would love to discuss this question.

Ineffective portion is reported in earnings immediately, but the text doesn’t address this. So, gotta know what the CFAI wants you to know and leave it at that, is my view.

Not a great question on part of CFAI.

If they are thinking like this then at least they should not have question with 2 correct answers.

I agree, however the text only addresses one of the answers specifically, and the idea is to not use outside knowledge and stick to the text.

You are right. That’s why they encourage everyone to read study text. Basic theme to read text is that they want people to understand testing style and approach of CFAI.

While i dont know anything on this beyond whats in the curriculum, but when i answered this question, i refered to three bullet points (on page-309 & 310) of the curriculum.

the second point (hedge exposure to variable cash flow) is applicable for this problem, and in curriculum it only talks about the effective part…and nothing on ineffective.

cfa2014 thank you for information.

CFA Errata for 2014:

Volume 2

Reading 22: In the two bulleted items at the top of p. 310, insert “other” before “comprehensive income.” In Practice Problem 6 (p. 313), change “net income” to “other comprehensive income” in options A and B, and insert “other” before “comprehensive income” in option C. Solution C remains correct.

I think this clears it. We no longer have two correct answer choices :slight_smile: