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Financial instruments

8.3 Fair value hedge accounting

At the reporting date, an entity must assess whether the fair value hedge has been
highly effective. If so, then normal accounting rules are over-ridden and fair value
hedge accounting rules are applied instead.

Under a fair value hedge, both the hedged item and the hedging
instrument are adjusted for the changes in fair value that have arisen
since the inception of the hedge. Any gains and losses are
recognised:

 in profit or loss in most cases, but

 in OCI if the hedged item is an investment in shares measured at
FVOCI

Any gain on the hedged item and any loss on the hedging instrument (or vice-versa)
will largely be offset in profit or loss meaning that volatility is reduced.

Illustrations and further practice

Now try TYU question 17 from Chapter 11.

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