Hedge accounting

Hedge accounting denotes the accounting treatment of two or more transactions that are in a designated hedging relationship. The transactions are such that each wholly or partly offsets the risk inherent in the other. One of the two transactions is generally referred to as the hedged item (the transaction giving rise to the risk) and the other as the hedging instrument (the transaction hedging the risk). The two transactions must be viewed jointly when determining whether they qualify for hedge accounting. According to International Financial Reporting Standards, the hedge accounting treatment can only be applied if the hedged item and hedging instrument qualify for hedge accounting, the hedging relationship is documented at the inception of the hedge, the hedge is expected to be highly effective and its effectiveness can be reliably measured and demonstrated at the inception of the hedge and in subsequent periods.