Hedge Accounting

Hedge accounting is an accounting method that aligns the timing of gains and losses from a hedging instrument (like a forward or option) with the item it is hedging — such as a future sale, purchase, or loan.

Its purpose is to reduce volatility in reported profits, ensuring the financial statements reflect the economic substance of the hedge rather than short-term market movements.

To qualify, the hedge must meet specific criteria under accounting standards (e.g. IFRS 9 or FRS 102), including documentation, effectiveness testing, and ongoing review.

Example:

A UK exporter hedges a €1 million future sale with a forward contract. Without hedge accounting, FX movements could create swings in profit and loss each period. With hedge accounting, those gains or losses are matched to the revenuewhen it’s recognised.

Used in:

Corporate treasury, financial reporting, and audit compliance to ensure transparent and consistent treatment of hedging activities.