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hedge accounting

Hedge accounting allows companies to recognise gains and losses on hedging instruments and the exposure they are intended to hedge, with both being registered in the same accounting period. This procedure reduces income statement volatility that would otherwise arise if both elements were accounted for separately.The financial instruments standard that deals with the accounting of FX hedges is called IFRS 9.

Issued by the International Accounting Standards Board (IASB), IFRS 9 requires firms that implement hedge accounting to provide detailed documentation on their risk management objectives, hedging instrument, hedged item and the nature of the risk hedged, as well as the results of tests that determine the effectiveness of the hedging relationship and the sources of ineffectiveness.