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HEDGING

Why Is Hedge Accounting Necessary? – IFRS 9.6.1

• All entities are exposed to some sort of risk.

• For example, gold mines are exposed to the price of gold,

airlines to the price of jet fuel, borrowers to interest rates,

and importers and exporters to foreign exchange rate risk.

• One way to manage these risks is for the entity to acquire a
financial instrument (derivative) to offset (minimise) the

risk the entity is exposed to.

• How is this done? The movement in the fair value of the

acquired derivative is used to match the possible adverse

movements of the risk item (for example, foreign currency

movements of a foreign creditor).

• In light of the above, the objective of hedge accounting is
to present in the financial statements, the effect of the

entity’s risk management activities that use financial

instruments to manage risk exposure that could impact on
profit or loss.

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