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5.6 Hedge accounting requirements
Publication date: 31 Mar 2024
us Derivatives & hedging guide
Certain criteria need to be met to be able to elect hedge accounting. Figure DH 5-3 summarizes considerations in qualifying for hedge accounting. Detail on the eligibility criteria is included in DH 6.2 for hedges of financial items, DH 7.2 for hedges of nonfinancial items, and DH 8 for hedges of foreign currency risk. Effectiveness is addressed in DH 9.
Figure DH 5-3
Considerations in qualifying for hedge accounting
Considerations in qualifying for hedge accounting
5.6.1 Eligibility of the risk to be hedged
The risk associated with the hedged item or transaction must qualify for hedge accounting. The risks eligible to be hedged depend on whether it is a fair value, cash flow, or foreign exchange hedge and whether the hedged item is a financial or nonfinancial instrument.
The hedged risk must result in exposure to a change in fair values or cash flows that could affect reported earnings.
5.6.2 Eligibility of the hedged item
Reporting entities can hedge certain recognized assets and liabilities, firm commitments, and forecasted transactions to reduce their exposure to changes in the fair value or cash flows associated with recognized balances and future transactions.
5.6.4 High effectiveness
To qualify for hedge accounting, the hedging instrument must be highly effective at offsetting the specified risk during the period the hedge is designated. Effectiveness is addressed in DH 9.
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