Hedge accounting
A system of incorporating a financial hedge into the accounting system.
Under International Financial Reporting Standards (IFRS) a qualifying hedge and the underlying transaction being hedged are accounted for separately.
Hedge accounting ensures that both items receive similar accounting treatment.
The hedge accounting treatment displaces the standard accounting rules, under which the underlying transaction and the hedge might be accounted for differently.
Hedge accounting is generally adopted for the purpose of reducing volatility in current year profits, net assets, or both.
There are strict qualifications that must be satisfied in order that hedge accounting may be used, including for example that the hedge can be shown to be effective.
