Hedge Accounting

When hedge accounting is called the recognition of two or more contracts (also known as financial instruments) that are in a hedging relationship. The relationship of these contracts is the opposite configuration with respect to such contract features that certain risks - mostly financial risks - reasons. Due to this design, the contracts are adapted to each other to compensate for some or all of the risks. Most is one of the two contracts as a hedged item - ie as one contract that evidences the risk or the risks - and the other contract as a hedging instrument or hedge business - that is, as one contract that ( a hedged ) hedges the risk or risks - referred to.

For hedge accounting special accounting rules that differ from the general rules apply to accounting.

The need for hedge accounting

The concept of hedge transaction or hedging (English for " protection offer " ) is generally in an inverse combination of highly correlated positions to reduce risk. This means that the effect of the hedged item and the hedging instrument should be opposite to lead to a compensatory effect in the profit and loss account or in equity.

Hedge accounting in the International Financial Reporting Standards ( IFRS)

The hedge accounting is from the perspective of the banks, the most controversial provisions of IFRS / IAS dar. principle results in the need for separate accounting rules for hedging relationships from the mixed model of evaluation ( mixed model ), based on the IAS 39. Bilan Decorates a bank for " normal" rules of IAS 39, the following constellation would be conceivable, for example: During the hedged item in a hedge of a balance sheet position is, which is to be valued at amortized cost, the associated hedge, a derivative is generally measured at fair value. Economically, created for the bank here neither a profit nor a loss, since the underlying and hedging business compensate. The mapping of the business, however, would run 39 asymmetrically according to the "normal" rules of IAS: Only the changes in value of the hedging instrument would be reflected in the profit and loss account, but not the changes in value of the hedged item. The economic risk of a general risk of loss the bank would have been realized successfully compensated for, but the balance sheet risk of a possible deterioration of the net assets, financial position and earnings would continue to exist and be reflected accordingly in the financial statements. To avoid such a situation, integrated financial instruments in hedging relationships of IAS 39 are recognized as a special case in the context of hedge accounting and rated by different rules than other financial instruments. There is a sync instead of in terms of the mapping of value fluctuations in hedged item and the hedging instrument.

Hedge types according to IAS 39

Accordingly, the risks to be backed IAS 39 differentiates three types of hedging relationships: a) Fair value hedge b ) Cash flow hedge c ) Hedge of net investments in foreign operations

The fair value hedge is a hedge the risk of changes in fair value of a recognized asset or liability or an off-balance sheet firm commitment ( firm commitment ) or a specific interest in such asset, liability or of such a fixed obligation if this proportion can be attributed to a particular risk and could affect profit or loss. As examples of a fair value hedge can be listed:

• The hedge of a fixed-rate position against changes in the fair value resulting from changes in market interest rates,

• The hedging of inventories against price risks,

• The hedge floating-rate financial instruments fair value changes when the market value between the repricing dates is subject to significant fluctuations.

In a fair value hedge, changes in opposing valuation effects of the hedged item and the hedging of the same in the profit and loss account.

Cash flow hedges are used to hedge the risk of fluctuations in cash flows. This danger can be assigned to either a specific, associated with a recognized asset or liability risk, or it may the a forecasted transaction (highly probable forecast transactions ) related risk be assigned. The risk of fluctuations in cash flows must also possibly have an effect on profit or loss. As examples of a cash flow hedge can be cited here:

• An interest rate swap with the floating rate position is converted to a fixed-rate position, or vice versa

• A currency, that is, a hedge of the foreign currency risk of a forecast transaction (eg forecasted sales in a foreign currency).

The changes in value of the hedging instrument is recognized directly in equity ( statement of changes in equity ) as far as it relates to the effective portion of the hedge. The ineffective portion is directly reflected in the income statement.

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

Looking at the first two types of hedge, they are at first glance simply distinguished from each other: at a single position, it is clear from the purpose of securing the type of hedging relationship. This ambiguity exists, however, on closer inspection not more readily. For composite items, it is depending of which is made from the standpoint of the comparison. This can be illustrated with the following example of the asset-liability management of banks. This can often be make the following findings, which are illustrated in the following figure:

The first variable-rate obligations exceed the floating rate loans ( lending )

2 The fixed-rate loans exceed the fixed rate liabilities.

Assuming otherwise is a balance between the total volume of claims and the total volume of liabilities, then the interest rate risk from two different points of view can be hedged:

1 The fixed interest overhang in receivables ( = credit business) is converted to a floating rate asset position using a swap, so that the fair value remains unchanged ( fair value hedge),

2 The excess of floating-rate liabilities ( = deposits, such as savings contracts) as is converted using a rate swaps in a liability position with a matching on lending firm cash flow (cash flow hedge).

In this way, therefore, both a fair value hedge, a cash flow hedge as well as lead to the desired hedging result.

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