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Chapter 4

Hedge accounting rules

2.1 Conditions for hedge accounting (IAS 39)

Initial arrangement

Designated as a hedge at inception.

Formal documentation identifying:

 hedged item

 hedge instrument

 nature of risk that is to be hedged

 how the entity will assess effectiveness.

Also, for a cash flow hedge – see details later in this chapter – the
future cash flow needs to be assessed as highly likely.

Effectiveness

Hedge expected to be highly effective (80% – 125%).

Effectiveness capable of reliable measurement.

Assessment of effectiveness takes place on an ongoing basis.

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