CFM27020 - Accounting for corporate finance: hedging: accounting treatment

Hedge accounting

Before IAS

Before the implementation of IAS there was limited guidance in respect of hedging, and entities had considerable discretion in developing accounting policies. Many hedging instruments are derivatives, reflecting the increased use of such instruments by business. Guidance on accounting for derivatives also developed significantly with the implementation of IFRS. Guidance on the treatment of derivatives is at CFM24000+

IAS and hedging

IAS 39 provides a strict set of criteria that must be met before hedge accounting can be used. Hedge accounting enables entities to modify the normal basis for recognising gains or losses on associated hedging instruments and hedged items. This provides the entity with the opportunity to reduce income statement volatility that would otherwise occur if the hedged items and hedging instruments were accounted for separately under GAAP without regard to the business purposes of the hedge.

For instance, if hedge criteria are not met, changes in the fair value of hedged items measured at fair value are reported in the income statement or equity; changes in the fair value of hedged items recognised at amortised cost are not recognised; and changes in fair value in the hedging instrument, for example a derivative, are reported through the income statement.

For a qualifying hedging relationship you need:

• A qualifying hedging instrument (CFM27030)
• A designated hedging relationship (CFM27060)
• A qualifying hedged item (CFM27080)