The necessity for the Hedge Accounting

The concept of the and/or Hedging (English for "„protection offer "“) generally exists in an inverse combination of high-correlated positions for the reduction of risks. This meant that the effect of underlying transaction and safeguard business should be moving in opposite directions, in order to lead to a compensatory effect in the profit and loss calculation or in own capital funds.

The Hedge Accounting in international accounting (international Financial reporting standard)

The illustration of safeguard relations represents the most disputed regulations of the IFRS/IAS from view of the banks. In principle the necessity for separate balance rules for safeguard relations results from the mixed model of the evaluation (Mixed Model), on which IAS 39 is based. If a bank balances according to "“normal"” rules of the IAS 39, the for example following constellation would be conceivable: While the underlying transaction of a Hedge consists of a balance sheet item, which is to be evaluated to continued initial costs, the pertinent safeguard business in form of a derivative is evaluated in principle success-effectively to the current value which can be settled. Economically seen, a profit, still another loss develop here for the bank neither, since reason and safeguard business compensate themselves. The illustration of the business would run however according to the "“normal"” regulations of the IAS 39 asymmetrically: Only the changes of value of the safeguard business would appear in the profit and loss calculation, not however the changes of value of the underlying transaction. The economic risk of a general loss danger of the bank would have been successfully compensated, but the risk relating to the balance of a possible degradation of the fortune, financial and earnings would exist further and in the end-of-year procedure would settle accordingly. In order to avoid such a constellation, in safeguard relations merged financial instruments are seized of IAS 39 in the context of the Hedge Accounting as a special case and evaluated according to other rules than other financial instruments.

Hedge kinds after IAS 39

According to the risks which can be secured IAS differentiates 39 three kinds from safeguard relations: A) Fair VALUE Hedgeb) cash-flow Hedgec) Hedge OF A Net Investment in A Foreign operation

That fair VALUE Hedge is the security of the risk of a change of fair VALUE of balanced net assets and/or a balanced commitment or a not balance-effective firm obligation (Firm Commitment) or a specific portion of such a net assets, such a commitment or such an firm obligation, if this portion can be assigned to a certain risk and effects on the period result have could. As examples one fair VALUE Hedge can be specified:

the security of a fixed interest position against changes of the current value which can be settled, which result from changes of the market interest rates,

the security of supplies against price adjustment risks,

the security of variable interest-bearing financial instruments against changes of market value, if the market value between the interest adjustment dates is subject to substantial fluctuations.

In the framework fair the evaluation effects moving in opposite directions from underlying transaction and safeguard business in the profit and loss calculation adjust themselves one for VALUE Hedge.

The cash-flow Hedge serves the security of the danger of fluctuations of the cash-flow. This danger can either a certain, with which net assets or the balanced commitment balanced connected risk are assigned, or it can be assigned to the risk connected with a foreseen transaction (highly probable forecast transaction). In addition the danger of fluctuations of the cash-flow must have been able possibly effects on the period result. As examples of a cash-flow Hedge can be stated:

a Zinsswap, with which a variable interest-bearing position is converted into a position at fixed interest,

a security of the foreign currency risk for a foreseen transaction (sales profits in a foreign currency, for example planned). The changes of value of the safeguard instrument directly in own capital funds seized (statement OF CHANGE in equity) so far it the effective part of the Hedge concerns. The ineffective part settles directly in the success estimation.

A Hedge OF A Net Investment in A Foreign operation serves the security of a net investment into a foreign business concern in accordance with IAS 21.

If one regards the two first mentioned forms of the Hedge, they are at first sight simply from each other definable: in the case of an individual item clearly the kind of the Hedge relationship results from the safeguard purpose. This clarity is no longer easily given however on closer inspection. With compound positions it depends on by which point of view from the comparison is made. This can be clarified with the following example at the eat Liability management by banks. Here the frequently following statements can be met, which are clarified in the following illustration:

1. The variable interest-bearing obligations exceed the variable interest-bearing demands (grantings of credit),

2. The demands at fixed interest exceed the commitments at fixed interest.

If one accepts otherwise a balanced relationship between the total volume of the demands and the total volume of the commitments, then the risk of change of interest can be secured from two different focuses:

1. The fixed interest overhang with the demands and/or in the loan business is converted assistance of a Swaps into a variable interest-bearing fortune position, so that that remains fair VALUE unchanged (fair VALUE Hedge),

2. The overhang at variable interest-bearing commitments is converted assistance of a Swaps into a debt position with a firm cash-flow fitting on the loan business (cash-flow Hedge).

Therefore in this way both fair a VALUE Hedge, and a cash-flow Hedge can lead to the desired security result.

Articles in category "Hedge Accounting"

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