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Hedge accounting at a glance
Introduction
Most companies hedge risk – that is, they take actions to mitigate or offset the risks that arise from
their activities. For financial risk – such as interest rate risk, currency risk, equity price risk and
commodity price risk – such hedging often involves the use of derivatives.
Hedge accounting seeks to reflect the results of hedging activities, in particular hedging using
derivatives, by reporting the effects of the derivative and the risk being hedged in the same period.
Hedge accounting allows entities to override the normal accounting treatment for derivatives (fair value
through profit or loss) or to adjust the carrying value of assets and liabilities. It is therefore a privilege, not
a right, and has to be earned. Entities can only obtain the right to achieve hedge accounting if they meet
the requirements set out in IAS 39. These requirements are numerous and complex.
What is hedge accounting?
IAS 39 deals with all financial assets and financial liabilities, including derivatives, loans, borrowings,
receivables and payables, and equity investments in other entities. It requires all financial assets and
financial liabilities to be classified into one of the five categories set out in the table below. These
categories determine how the financial instrument is measured subsequent to its recognition (at fair
value or amortised cost) and where any changes in fair value are reported (in the income statement
or equity).
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