Hedge Accounting

Bernhard Wondrak

The objective of the International Accounting Standard 39 (IAS 39) was to establish principles for recognising and measuring financial assets and liabilities. Beside the regulations for categorisation and measurement of financial instruments, the impairment and the hedge accounting in IAS 39 are the most important regulations for the financial industry. One of the most complex paragraphs in the whole standard is the passage about hedge accounting.

The regulations about hedge accounting were introduced in IAS 39 to eliminate or reduce marked-to-market profit or loss from the banking book. Marked-to-market profit or loss arises from hedging of market risks from commercial business (loans, deposits) and securities with derivatives. Derivatives have to be measured at fair value in any cases. The commercial business, such as loans to private and corporate clients as well as liabilities, has to be measured at amortised cost. Securities booked as “available for sale” have to be measured at fair value through other comprehensive income. Therefore, hedging market risk from commercial business and securities with derivatives causes a valuation mismatch that leads to unwanted marked-to