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TABLE OF CONTENTS CHAPTER I GENERAL PROVISIONS CHAPTER II HEDGING INSTRUMENTS AND HEDGED ITEMS CHAPTER III RECOGNITION AND MEASUREMENT OF HEDGES CHAPTER I GENERAL PROVISIONS Article 1. For the purpose of regulating the recognition and measurement of hedges, these Standards are formulated in accordance with the Accounting Standards for Enterprises-Basic Standards. Article 2. The term "hedge" refers to one or more hedging instruments which are designated by an enterprise for avoiding the risks of foreign exchange, interest rate, commodity price, stock price and credit, and which is expected to make the changes in fair value or cash flow of hedging instrument(s) to offset all or some of the changes in the fair value or cash flow of the hedged item. Article 3. The hedges are classified into fair value hedges, cash flow hedges, and hedges of net investment in an overseas operation: (1) A fair value hedge refers to a hedge of the exposure to changes in the fair value of a recognized asset or liability or a previously unrecognized firm commitment, or to changes in the identifiable portion of the fair value of a recognized asset or liability or a previously unrecognized firm commitment. Such changes in value are attributable to a particular risk and could affect profit or loss; (2) A cash flow hedge refers to a hedge of the exposure to changes in cash flow. Such changes in cash flow are attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction and could affect profit or loss; (3) A hedge of net investment in an overseas operation refers to hedge of the foreign exchange exposure arising from net investment in an overseas operation. The "net investment in an overseas operation" refers to an enterprise's equity proportion in the net assets in an overseas operation. Article 4. For a hedge which satisfies the conditions as described in Chapter III of these Standards, the enterprise may treat it through the hedge accounting method. The "hedge accounting method" refers to a method to record, in the profits and losses of the current period, the result of offsetting the hedging instrument and the changes of the fair value of the hedged item. CHAPTER II HEDGING INSTRUMENTS AND HEDGED ITEMS Article 5. The term "hedging instrument" refers to a derivative instrument which is designated by an enterprise and by which it is expected that changes in its fair value or cash flow can offset the changes in fair value or cash flow of the hedged item. With regards to a hedge for foreign exchange risk, a non-derivative financial asset or non-derivative financial liability may be used a hedging instrument. Article 6. To establish the hedge relationship, an enterprise shall designate all or some of the hedging instruments (excluding a certain time period within the residual time limit of the hedge instrument) with the exception of the following: (1) For an option, the enterprise may separate the intrinsic value from the time value of the option and merely designate the option as a hedging instrument on the basis of the changes of its intrinsic value; and (2) For a forward contract, the enterprise may separate the interest from the spot price of a forward contract and merely designate the forward contract as a hedge instrument on the basis of the changes of spot price. Article 7. Generally an enterprise may designate a single derivative instrument as a hedge for a risk, but if the following conditions are met, it shall may designate a single derivative instrument as a hedge for one or more risks: (1) All risks to be hedged are clear and identifiable; (2) The effectiveness of hedge may be proved; and (3) It can ensure that there is a specific designation relationship between the derivative instrument and different risk positions. The "hedge effectiveness" refers to the extent that the changes in the fair value or cash flow of a hedging instrument offset the changes in the fair value or cash flow of a hedged item resulted from the hedged risks. Article 8. An enterprise may designate a combination of two or more derivative instruments or a certain proportion of such a combination as a hedging instrument. For an overseas exchange hedge, the enterprise may designate a combination of two or more non-derivative instruments or a certain proportion of such a combination, or a combination of derivative instrument(s) and non-derivative instrument(s) or a certain proportion of such a combination as a hedging instrument. For a collar option, or for an option composed of an issued option and a purchased option, if it is equivalent to an option issued by the enterprise in essence (that is to say, the enterprise charges for the net option), the enterprise can not designate it as a hedging instrument. Article 9. The "hedged item" refers to the following items which make an enterprise exposed to changes in fair value or cash flow and are designated as the hedged objectives: (1) A single recognized asset, liability, firm commitment, highly probable forecast transaction, or a net investment in an overseas operation; (2) A group of assets, liabilities, firm commitments, highly probable forecast transactions, or net investments in overseas operations with similar risk characteristics; and (3) A portion of the portfolio of financial assets or financial liabilities that share the risk being hedged (only applicable to a portfolio hedge of interest rate risk). The "firm commitment" refers to an agreement with legal binding force regarding the exchange of a particular number of resources at the stipulated price on a specific future date or in a specific future period. The "forecast transaction" refers to a transaction for which no commitment is made, but which is expected to occur. Article 10. If the hedged risk is a credit risk or foreign exchange risk, the held-to-maturity investment may be designated a hedged item. If the hedged risk is an interest rate risk or risk of repayment ahead of the schedule, the held-to-maturity investment shall not be designated as a hedged item. Article 11. If the gain or loss of any monetary item formed by an intra-group transaction of an enterprise is unable to be fully offset in the consolidated statements, the foreign exchange risk of this monetary item may be designated as a hedging item in the consolidated financial statements. For a highly probable forecast intra-group transaction of an enterprise, if its price is denominated in a currency other than the functional currency of the subject entering into that transaction (that is to say, its price is denominated in an overseas currency) and if the relevant foreign exchange risk will affect consolidated financial statements, such foreign exchange risk may be designated as a hedged item in the consolidated financial statements. Article 12. For a portion of the risk relating to the cash flow or fair value of a financial asset or financial asset, if the effectiveness of hedge may be measured, the enterprise may, on the basis of the risk, designate financial asset or financial liability as a hedged item. Article 13. With regard to a fair value hedge for the interest rate risk of a portfolio of financial assets or financial liabilities, the amount of an asset or liability denominated in a certain currency (such as RMB, US dollar or Euro dollar) may be designated as a hedged item. Article 14. An enterprise may designate all of the cash flows of a financial asset or financial liability as a hedged item. However, if only a portion of the cash flows of a financial asset or financial liability is designated as a hedged item, the designated portion shall be less than the total amount of the cash flows of the financial asset or financial liability. Article 15. Where a non-financial asset or non-financial liability is designated as a hedged item, the hedged risk shall be all risks or foreign exchange risks relating to this non-financial asset or non-financial liability. Article 16. With regard to a hedged portfolio of assets or liabilities with similar risk characteristics, each single asset or liability among the portfolio shall simultaneously undertake the hedged risk and the changes in fair value of each single asset or liability in the portfolio resulted from the hedged risk shall, by and large, be in proportion to all the changes in the fair value of the portfolio resulted from the hedged risk. CHAPTER III RECOGNITION AND MEASUREMENT OF HEDGES Article 17. Where a fair value hedge, cash flow hedge or a hedge of net investment in an overseas operation simultaneously satisfies the following conditions, it may be treated through the hedge accounting method as provided for in these Standards: (1) At the commencement of the hedge, the enterprise formally designates the hedge relationship (namely the relationship between the hedging instrument and the hedged item) and prepares a formal written document about the hedge relationship, risk management objectives and the strategies of hedge. This document shall at least specify the hedging instrument, the hedged item, the nature of the hedged risk and the method for the assessment of the effectiveness of the hedge. The hedge shall be relevant to the designated specific identifiable risk, and will ultimately affect the profits and losses of the enterprise; (2) The hedge is expected to be highly efficient and meets the risk management strategy which is adopted for the hedge relationship; (3) For a cash flow hedge of forecast transaction, the forecast transaction shall be likely to occur and shall make the enterprise exposed to the risk of changes in cash flow, which will ultimately affect the profits and losses; (4) The effectiveness of hedge can be reliably measured; and (5) An enterprise shall continuously assess the effectiveness of hedge and ensure that the hedge is highly effective in accounting period designated for the hedge relationship. Article 18. If a hedge simultaneously satisfies the following conditions, the enterprise shall recognize it as being highly efficient: (1) At the inception of a hedge and in subsequent periods, the hedge are expected to be highly effective in offsetting the changes in the fair value or cash flows caused by the hedged risk during the designated periods; and (2) The hedge's actual offset results are within a range of 80% to 125%. Article 19. An enterprise shall at least assess the hedge effectiveness when formulating interim or annual financial statements. Article 20. For a hedge of interest rate risk, the enterprise shall, by formulating the maturity timetable of financial assets and financial liabilities, mark out the net risk of interest rate for each period and assess the hedge effectiveness accordingly. Article 21. If a fair value hedge satisfies the conditions for adopting the hedge accounting method, it shall be treated according to the following provisions: (1) If the hedging instrument is a derivative instrument, the gain or loss from the changes in the fair value of the hedging instrument shall be recorded in the profits and losses of the current period. If the hedging instrument is a non-derivative instrument, the gain or loss on the carrying amount of the hedging instrument incurred by changes in exchange rate shall be recorded in the profits and losses of the current period; (2) The gain or loss on the hedged item incurred by the hedged risk shall be recorded in the profits and losses of the current period and in the mean while the carrying amount of the hedged item shall be adjusted. The said provision shall also be applicable if the hedged item is an inventory of which the subsequent measurement will be made at its cost and realizable net value, whichever is lower, or a financial asset of which the subsequent value will be made at the amortized cost, or a financial asset available for sale. Article 22. With regard to a fair value hedge for the interest rate risk of a portfolio of financial assets or financial liabilities, if it satisfies the requirements of Article 21 (2) of these Standards, the enterprise shall treat the gain or loss from the hedged item through the following methods: (1) If the hedged item is an asset within the re-pricing period, it shall be presented as a separate item under the assets (following the financial assets) of the balance sheet, and shall be written off after the cessation of recognition; (2) If the hedged item is a liability within the re-pricing period, it shall be presented as a separate item under the liabilities (following the financial liabilities) of the balance sheet, and shall be written off after the cessation of recognition. Article 23. Where any of the following conditions is satisfied, the enterprise shall stop making the following treatments in accordance with Article 21 of these Standards: (1) The hedging instrument has been mature or has been sold, or the contract is terminated or has been exercised. Where the period of hedging instrument is extended, or where a hedging instrument is replaced by another one, if the extension or replacement is an integral part of the hedging strategy as specified in the formal written document of the enterprise, the enterprise shall not treat the hedge as being in the case of maturity or termination of contract; (2) The hedge does not satisfy the conditions for adopting the hedge accounting method as specified in these Standards any longer; (3) The enterprise has revoked the designation of the hedge relationship. Article 24. If a hedged item is a financial instrument measured at the amortized cost, an adjustment which is made to the carrying amount of the hedged item in accordance with Article 21 (2) of these Standards shall, during the period from the adjustment date to the maturity date, be amortized on the basis of the effective interest rate recalculated on the adjustment date and shall be recorded in the profits and losses of the current period. For a fair value hedge of interest rate risk portfolio, the relevant items separately presented in the balance sheet shall, during the period from the adjustment date to the relevant date on which the re-pricing period ends, be amortized on the basis of the effective interest rate re-calculated on the adjustment date. If it is not feasible to adopt the effective interest rate method for the amortization, it shall adopt the straight line method. The amortization of above-mentioned adjustment amounts shall be finished on the maturity date of the financial instrument. For a fair value hedge of interest rate risk portfolio, the amortization shall be finished prior to the date of end of the relevant re-pricing period. Article 25. If a hedged item is an unrecognized firm commitment, the accumulative amount of the changes in the fair value of the firm commitment incurred by the hedged risk shall be recognized as an asset or liability and the relevant gain or loss shall be recorded in the profits and losses of the current period. Article 26. For a fair value hedge of firm commitment to purchase an asset or undertake a liability, an adjustment shall, on the basis of the accumulative amount of the changes in the fair value incurred by the hedged risks, be made to the amount of initial recognition of the asset obtained or liability undertaken due to the firm commitment. Article 27. Where a cash flow hedge meets the conditions for adopting the hedge accounting method, it shall be treated according to the following provisions: (1) Of the profit or gain on the hedging instrument, the portion which is attributable to the effective hedge shall be directly recognized as the owner's equity and shall be presented as a separate item. The amount of the portion of the effective hedge shall be determined according to the absolute amounts of the following items, whichever is lower: 1. The accumulative profit or loss on the hedging instrument as of the commencement of hedge; or 2. The accumulative amount of changes in the present value of the estimated future cash flow of the hedged item as of the commencement of the hedge; (2) Of the gain or loss on the hedging instrument, the portion which is attributable to the ineffective hedge (namely the gain or loss less the portion directly recognized as the owner's equity) shall be recorded in the profit and loss of the current period; (3) If the formal written document on the risk management strategy states that a certain portion of the gain or loss on a hedging instrument, or the relevant effects on the cash flow will be excluded in the assessment of the hedge effectiveness, the excluded portion profit or loss shall be treated in accordance with the Accounting Standards for Enterprises No. 22-Recognition and Measurement of Financial Instruments. An enterprise may treat a hedge of foreign exchange risk of firm commitment as a cash flow hedge or fair value hedge. Article 28. If a hedged item is a forecast transaction and if the forecast transaction makes the enterprise subsequently recognize a financial asset or financial liability, the relevant gain or loss originally and directly recognized as the owner's equity shall be shifted out of the same period in which this financial asset or financial liability affects the gain or loss of the enterprise and shall be recorded in the current profits and losses. However, when all or partial net loss expected by the enterprise to be originally and directly recorded in the owner's equity can not be recovered in the future accounting period, the portion which can not be recovered shall be shifted out and shall be recorded in profits and losses of the current period. Article 29. If a hedged item is a forecast transaction and if the forecast transaction makes the enterprise subsequently recognize a non-financial asset or non-financial liability, the enterprise may choose either of the following methods to treat it: (1) The relevant gain or loss originally and directly recognized in the owner's equity shall be shifted out from of the same period in which this financial asset or financial liability affects the gain or loss of the enterprise and shall be recorded in the current profits and losses. However, when all or partial net loss expected by the enterprise to be originally and directly recorded in the owner's equity can not be recovered in the future accounting period, the portion which can not be recovered shall be shifted out and shall be recorded in profits and losses of the current period; or (2) The relevant gain or loss originally and directly recognized in the owner's equity shall be shifted out and shall be recorded in the amount of the initial recognition of the non-financial asset or non-financial liability. When the forecast transaction of a non-financial asset or non-financial liability forms a firm commitment, if the firm commitment satisfies the conditions for adopting the hedge accounting method as provided for in these Standards, either of the above-mentioned methods shall be chose to treat it as well. When an enterprise chooses either of the above-mentioned methods as an accounting policy, it shall apply it to all relevant forecast transaction hedges and shall not change it randomly. Article 30. With regard to a cash flow hedge involved in Articles 28 and 29 of these Standards, the gain or loss on the hedging instrument originally recorded in the owner's equity shall be shifted out of the same period, during which the profits and losses of the hedged forecast transaction are affected, and shall be recorded in the profits and losses of the current period. Article 31. An enterprise shall stop making the following treatments in accordance with Articles 27 and 30 of these Standards: (1) The hedging instrument has been mature or sold, or the contract is terminated or has been exercised. The gain or loss on the hedging instrument which is directly recorded in the owner's equity during effective period of the hedge shall not be shifted out and shall be treated in accordance with Article 28, 29 or 30 of these Standards until the forecast transaction actually occurs. If the period of a hedging instrument is extended, or if a hedging instrument is replaced by another, and if the extension or replacement is an integral part of the hedge strategy as specified in the formal written document of the enterprise, it shall not be treated as being in the case of maturity or termination of contract; (2) The hedge no longer satisfies the conditions for adopting the hedge accounting methods as mentioned in these Standards. The gain or loss on the hedging instrument which is directly recorded in the owner's equity during the effective period of the hedge shall not be shifted out and shall be treated in accordance with Article 28, 29 or 30 of these Standards until the forecast transaction actually occurs; (3) It is expected that the forecast transaction will not occur. The gain or loss on the hedging instrument which is directly recorded in the owner's equity during the effective period of the hedge shall be shifted out and shall be recorded in the profits and losses of the current period; (4) An enterprise revokes the designation of the hedge relationship. For a hedge of forecast transaction, the gain or loss on the hedging instrument which is directly recorded in the owner's equity during the effective period of the hedge shall not be shifted out until the forecast transaction actually occurs, or until it is expected that it will not occur. If the forecast transaction actually occurs, it shall be treated in accordance with Article 28, 29 or 30 of these Standards. If it is expected that the forecast transaction will not occur, the relevant gain or loss originally and directly recorded in the owner's equity shall be shifted out and shall be recorded in the profits and losses of the current period. Article 32. A hedge of net investment in an overseas operation shall be treated according to the provisions similar to the cash flow hedge accounting: (1) Of the gain or loss on the hedging instrument, the portion attributable to the effective hedge shall be recognized as the owner's equity and shall be presented as a separate item. When disposing of an overseas operation, the gain or loss on the hedging instrument reflected by the separately presented item in the owner's equity shall be shifted out and shall be recorded in the profits and losses of the current period; (2) Of the gain or loss on the hedging instrument, the portion attributable to the ineffective hedge (namely the namely the gain or loss less the portion directly recognized as the owner's equity) shall be recorded in the profits and losses of the current period. |
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