Hedge accounting is optional: it is an elective decision of the management of an entity. Hedge accounting is a special accounting treatment available to ensure that the timing of P&L recognition on the hedging instrument matches that of the hedged item.
1. takes two forms:
a) Fair value hedge: recognizing gains or losses in respect of both the hedging instrument and hedge item in the same accounting period,
b) Cash flow or net investment hedge: deferring recognized gains and losses in respect of the hedging instrument on the balance sheet until the hedged item affects earnings.
2. involves two elements which are linked by a hedging relationship:
a) A hedged item: contains the risk exposure that could affect the income statement,
b) A hedging instrument: in most cases, will be a derivative or group of derivatives used to mitigate the risk exposure encapsulated in the hedged item.
One of the fundamental requirements for a hedging relationship to qualify for hedge accounting is that formal hedge documentation be prepared at inception of the hedging relationship. The formal documentation must identify the following:
CNS Treasury’s hedge accounting software provides:
Please refer to IFRS9 Financial Instruments.
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