Hedge accounting

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As a hedge accounting which is called accounting two or more transactions (also known. Financial instruments) that are in a security context. The relationship between these contracts consists in the opposing design with regard to contract features that give rise to certain risks - mostly financial risks. Because of this structure, the contracts are suitable for partially or fully compensating for the risks. Usually one of the two contracts is used as the underlying transaction - i.e. as the contract that creates the risk or risks - and the other contract is used as a hedge transaction - i.e. as the contract that hedges the risk or the risks (of an underlying transaction) - designated.

Special accounting rules apply to hedge accounting that differ from the general accounting rules.

The need for hedge accounting

The concept of the hedge business or hedging (English for "offer protection") generally consists of an inverse combination of highly correlated positions to reduce risks. This means that the effect of the underlying transaction and the hedging transaction should work in opposite directions in order to have a compensatory effect in the income statement or in equity.

Hedge accounting in international accounting ( IFRS )

From the banks' point of view, the mapping of hedging relationships is one of the most controversial regulations of the IFRS / IAS. Basically, the need for separate accounting rules for hedging relationships results from the mixed model of valuation (mixed model) on which IAS 39 is based. If a bank accounts according to the “normal” rules of IAS 39, the following constellation would be conceivable, for example: While the underlying transaction of a hedge consists of a balance sheet item that is valued at amortized cost, the associated hedging transaction in the form of a derivative is generally valued at fair value through profit or loss ( Accounting mismatch ). From an economic point of view, there is neither a profit nor a loss for the bank, as the underlying and hedging transactions offset each other. According to the “normal” regulations of IAS 39, however, the transactions would be shown asymmetrically: only changes in the value of the hedging transaction would be reflected in the income statement, but not changes in the value of the underlying transaction. The economic risk of a general risk of loss for the bank would have been successfully offset, but the balance sheet risk of a possible deterioration in the asset, financial and earnings position would still exist and would be reflected in the annual financial statements. In order to avoid such a constellation, financial instruments integrated in hedging relationships are recognized as a special case by IAS 39 in the context of hedge accounting and valued according to different rules than other financial instruments. There is a synchronization with regard to the mapping of fluctuations in value for the underlying transaction and the hedging instrument.

Types of hedge according to IAS 39

According to the risks to be hedged, IAS 39 differentiates between three types of hedging relationships: a) fair value hedge b) cash flow hedge c) hedge of a net investment in a foreign operation

The fair value hedge is the hedge of the risk of a change in the fair value of a recognized asset or liability or an off-balance sheet firm commitment or a specific portion of such an asset, liability or such firm commitment, if this share can be assigned to a specific risk and could have an impact on the profit or loss for the period. Examples of a fair value hedge can be:

  • The hedging of a fixed-interest position against changes in the fair value that result from changes in market interest rates,
  • The protection of inventories against the risk of price changes,
  • The hedge of variable-interest financial instruments against changes in market value if the market value is subject to significant fluctuations between the interest rate adjustment dates.

In the context of a fair value hedge, the opposing valuation effects from the underlying transaction and the hedging transaction offset each other in the income statement.

The cash flow hedge is used to protect against the risk of fluctuations in the cash flow. This risk can either be assigned to a specific risk associated with the recognized asset or liability, or it can be assigned to the risk associated with a forecast transaction (highly probable forecast transaction). The risk of fluctuations in cash flow must also have an impact on the profit or loss for the period. Examples of a cash flow hedge can be cited:

  • An interest rate swap that converts a floating rate position into a fixed rate position, or vice versa
  • A currency swap , i.e. H. a hedge of the foreign currency risk for a forecast transaction (for example planned sales in a foreign currency).

Changes in the value of the hedging instrument are recorded directly in equity (statement of changes in equity) insofar as they affect the effective part of the hedge. The ineffective part is immediately reflected in the income statement .

A hedge of a net investment in a foreign operation is used to hedge a net investment in a foreign operation in accordance with IAS 21 .

If you look at the first two forms of hedge, they can be easily distinguished from one another at first glance: in the case of an individual item, the type of hedge relationship clearly results from the purpose of the hedge. On closer inspection, however, this uniqueness is no longer readily given. In the case of composite items, it depends on the point of view from which the comparison is made. This can be illustrated with the following example using the asset-liability management of banks. The following statements can often be made here, which are illustrated in the following figure:

  1. The variable rate obligations exceed the variable rate receivables (loans granted),
  2. The fixed-interest receivables exceed the fixed-interest liabilities.

If one otherwise assumes a balanced relationship between the total volume of receivables and the total volume of liabilities, then the interest rate risk can be hedged from two different points of view:

  1. The fixed interest surplus on receivables (= lending business) is converted into a variable-interest asset position using a swap so that the fair value remains unchanged (fair value hedge),
  2. The surplus of variable-interest liabilities (= deposit business, such as savings contracts) is converted into a debt position with the help of a swap with a fixed cash flow that matches the lending business (cash flow hedge).

In this way, both a fair value hedge and a cash flow hedge can lead to the desired hedging result.