Hedge Accounting

The aim of hedge accounting, if it is used, is to reflect appropriately in a company’s financial statements the effects of risk management strategies. A company may use financial instruments, for example, derivatives, as a tool to manage risks e.g. currency risk, interest-rate risk, commodity price risk, which can have an impact on the profit and loss statement or the ‘other comprehensive income’. The application of hedge accounting, which is optional, ensures that the gains and losses on the risk that is hedged and the derivative financial instrument used to manage the risk are matched and recognised in the same accounting period.