Hedge accounting
Financial reporting.
Hedge accounting is designed to ensure that hedging instruments and hedged items both receive similar accounting treatment.
This means that any gains or losses on the hedging instrument will be recognised in profits in the same accounting period as the offsetting losses and gains on the hedged item.
Hedge accounting is generally adopted for the purpose of reducing volatility in reported profits.
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.
Under IFRS 9 (and previously under IAS 39) hedge accounting is voluntary and can only be applied prospectively from the point that a hedging instrument and hedged item are formally designated in a hedging relationship and the other qualifying criteria are met, including an assessment of the expected effectiveness of the hedge.
If for any reason a hedging relationship does not meet all of the necessary conditions, hedge accounting cannot be applied.
