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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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