CFM16267 - Accounting for financial instruments: IAS 32 and IAS 39: types of hedging relationships

Categories of hedging relationships in IAS 39

Where certain conditions are met and there is a designated hedging relationship, IAS 39 allows offset to be achieved in accounting terms. The standard defines three categories of hedging relationships:

• Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability, or an unrecognised firm commitment. For fair value hedges, offset is achieved by recognising fair value changes in both the hedged item and the hedging instrument through profit and loss.
• Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable either to a particular risk associated with an asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable future transaction (such as interest payments on a loan the entity knows it will take out in the future).
• Hedge of a net investment in a foreign operation

This section of the guidance looks in more detail at these three types of hedging relationship, and at the qualifying criteria for a hedging relationship. If these criteria are not met, gains and losses arising from changes in the fair value of a hedged item that is measured at fair value are reported in the income statement or in equity as appropriate. Fair value adjustments of a hedging instrument that is a derivative, but does not qualify for special hedge accounting, is reported through the income statement.