Is hedge accounting mandatory?
Is hedge accounting mandatory or optional?
Hedge accounting is not mandatory. However, considering the benefits of complying with hedge accounting, entities would want to follow hedge accounting when they are in a position to comply with the requirements for hedge accounting. The biggest benefit of hedge accounting is that it reduces the volatility in the profit and loss accounts. Volatility in the profit and loss account is caused due to certain accounting mismatches arising on account of classification of a hedged item and the hedging instrument for the purpose of hedging. For example, an entity may enter into a derivative contract in order to freeze say the price of the commodity that it either buys or sells. The forecasted purchase or sales or a firm commitment to buy or sell a non-financial item is not recognised in the books of accounts till the entity enters into the actual transaction. The derivative which is taken to hedge the aforesaid proposed transaction should be valued at fair value causing unnecessary fluctuations in the profit and loss account while the objective of taking the derivative is to effectively freeze the buying or selling rate, as the case may be. However, in order to implement hedge accounting, the entity is required to comply with several requirements on a continuous basis so long as the hedging relationship subsists.