Hedge accounting risk

Hedge accounting risk (hedge accounting) in accordance with IAS 39

Hedge accounting is a risk management technique by using derivatives or other hedging instruments to compensate (offset) changes in fair value or changes in cash flows related to assets, liabilities, and transactions in the future. IAS 39 covers special accounting principles for hedging activities. If certain conditions are met, an entity is allowed to deviate from the provisions of common accounting and apply hedge accounting for assets and liabilities related to hedging activities. Provisions regarding hedge accounting treatment is optional; entities are not required to apply. Effect of hedge accounting is, gain or loss on the hedging instrument and the protected items are recognized in the same period; gains and losses are matched in the same period.
Elements of hedging activities

There are two elements in hedging activities:

    Hedging instruments. Include derivative hedging instruments, non-derivative financial asset or non-derivative financial liabilities. All derivative contracts with external parties can be used as hedging instruments, except for some written options. Assets and liabilities are non-derivative can only be used as hedging instruments on the foreign currency risk. For a hedging instrument, fair value or cash flow hedging instruments shall compensate the resulting changes in fair values ​​or cash flows of assets, liabilities, or transactions protected. For hedging purposes, only instruments associated with external parties are allowed to be used as a hedging instrument.
    Item. Items that are protected (hedged item) include assets, liabilities, firm commitments, transactions that will occur in the future, or a net investment in a foreign operation. To be protected item, the item must be risky for the company, fair value or cash flows arising in the future may change and affect corporate profits.

IAS 39 identifies three types of hedging:

    Fair value hedges or fair value hedge.
    Cash flow hedges, or cash flow hedge
    Hedging of net investments in foreign operations.

The accounting treatment

Hedge accounting relate to the accounting treatment of (1) the hedging instrument (2) items are protected so that the compensation (offsetting) the change in fair value or cash flows could be recognized in the financial statements for the same period. In general, the accounting for hedging activities may dikelopokkan into two treatment categories:

    Changes in the fair value of protected items recognized in the current period as balancing (offsetting) the recognition of changes in fair value of its hedging instruments (fair value hedge accounting treatment).
    Recognition of fair value hedging instruments are deferred (deferred) as a separate element in the equity and accounted for in the profit / loss when the item is protected by affecting profit / loss (cash flow hedge accounting and net investments in foreign operations).

Criteria for hedge accounting

Hedge accounting is optional; an entity may only suspend or accelerate the recognition of gain or loss under the provisions of accounting where it uses.

To prevent abuse, IAS 39 limits the use of hedge accounting. Hedge accounting may be applied if specific conditions are met: