CFM27140 - Accounting for corporate finance: hedging: IAS 39: fair value hedge: accounting

Accounting for a fair value hedge

In order to apply hedge accounting, an entity must meet the criteria set out by IAS39 (CFM27060). Assuming these criteria are met, fair value hedges should be accounted for as follows:

• The hedging instrument is re-measured at fair value where it is a derivative. Non-derivatives may only be designated as hedging instruments for a hedge of a foreign currency risk, and in that case only the foreign currency element of the non-derivative is re-measured. Gains or losses arising on the re-measurement of the hedging instrument are recognised in profit or loss.
• The carrying value of the hedged item is adjusted for the gain or loss attributable to the hedged risk only. The gain or loss is recognised in profit and loss. This provision will still apply if the hedged item is an available-for-sale (AFS) financial asset, or otherwise measured at cost.

For example, a company purchases fixed rate debt, which is classified within loans and receivables asset and would normally be carried at amortised cost. Changes in both market rates of interest and in the borrower's credit status will affect the fair value of the loan. If the company hedges the interest rate risk, the carrying value of the loan will be adjusted for changes in fair value attributable to interest rate changes, but not for those attributable to changes in credit quality.

All gains and losses attributed to the hedged risk are recognised in the income statement, with the result that there is no net profit and loss effect, other than any hedge ineffectiveness. Where the hedged item is an AFS financial asset, the gain or loss attributable to the hedged risk is recognised in the income statement, rather than equity, although the remainder of any fair value gain or loss is recognised in equity.