Journal of Accounting and Management Information Systems (JAMIS)

Recognition and measurement relating to hedge accounting

7/2004 ,   p75..85


Keywords:   risk, derivative, fair value hedge, cash flow hedge

Entities should face many risks that have been developed lately: exchange risk, interest related risk, market risk, credit risk, liquidity risk and cash flow risk. To manage these risks, entities use derivatives for hedge accounting purposes. Hedging relationships are of three types: fair value hedge, cash flow hedge and hedge of a net investment in a foreign entity. If certain conditions are met, accounting rules used in hedge accounting change the basic rules of recognition and measurement of financial instruments. The paper illustrates the recognition and the measurement of a swap contract that is designated by an entity as a hedging instrument in both, the fair value hedge and the cash flow hedge. There is also presented the accounting treatment for a future contract used as a hedging instrument in the fair value hedge.