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This guidance applies to companies which apply IFRS, New UK GAAP or FRS 26.

Types of hedge

Accounting standards identify three main types of hedge:

• Cash flow hedges are intended to hedge the exposure to variations in cash flows that are attributable to a risk associated with the hedged item.
• Fair value hedges are intended to hedge the exposure to variations in the fair value of the hedged item.
• Net investment hedges are intended to hedge movements in the assets and liabilities held in a foreign investment with foreign exchange movements on the related financing.

Conditions for hedge accounting

Not all hedging arrangements qualify for hedge accounting. For a qualifying hedging relationship you need:

• A qualifying hedging instrument (CFM27030)
• An appropriately documented economic relationship between the hedged item and hedging instrument (CFM27060)
• A qualifying hedged item (CFM27080)

Mechanics of hedge accounting

Designated fair value hedges (CFM27130)

»Ê¹ÚÌåÓýapp effect is to adjust the accounting of the hedged item by making an adjustment to the carrying value of the hedged item for the fair value risk being hedged. A corresponding amount is recognised in the P&L.

Designated cash flow hedges (CFM27140)

»Ê¹ÚÌåÓýapp effect is to adjust the accounting of the hedging instrument by taking the fair value movements on the hedging instrument attributable to the hedged risk to a ‘cash flow hedging reserveâ€� (shown as ‘other comprehensive incomeâ€�). »Ê¹ÚÌåÓýappse amounts are then recycled from the cash flow hedging reserve to either P&L or the carrying value of the asset/liability in line with the hedged risk.

Designated net investment hedge (CFM27180)

»Ê¹ÚÌåÓýapp accounting is similar to a designated cash flow hedge.