An entity prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
• The entitiy borrowed $100 million at a variable rate of interest.
• In order to protect itself against the variability of its interest cashflows, the entity entered into a pay-fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this date was zero.
30 June 20X2
• The entity received a net settlement of $2 million under the swap. After this net settlement, the fair value of the swap was $5 million – a financial asset.
The entity decides to use hedge accounting for this arrangement and has designated it as a cash flow hedge. The swap is a perfect hedge of the variability of the cash interest payments.
Which of the following describes the treatment of the settlement and the change in the fair value of the swap in the statement of profit or loss and other comprehensive income for the year ended 30 June 20X2?
A . $7 million is recognised in profit or loss.
B . $7 million is recognised in other comprehensive income.
C . $2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.
D . $5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.
Answer: C