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Financial Reporting · Hedge Accounting

Hedge Accounting Objective and Scope under Ind AS 109 and Ind AS 107

Updated 5 October 2026 · Fact-checked

Hedge accounting is an optional accounting treatment under Ind AS 109 that lines up the timing of gains and losses on a hedging instrument with those on the hedged item, removing an accounting mismatch. To answer a question, check the hedge qualifies, name the risk, identify the instrument and item, then apply the matching hedge model and disclosures.

Understand Hedge Accounting Objective and Scope

Start with the problem. A company has a risk, such as a foreign currency payable or a fixed-rate loan. It enters a derivative, such as a forward contract, to offset that risk. Economically, the loss on one is offset by the gain on the other. Under normal accounting, though, they can be measured differently and hit profit or loss in different periods. Derivatives are usually measured at fair value through profit or loss. The hedged item may be at cost or amortised cost, or its gain may not be recognised yet because it is a future transaction. The result is an accounting mismatch: profit becomes volatile even though the risk is economically neutralised.

Hedge accounting fixes this. It changes the normal recognition and measurement so that the effect of the hedging instrument and the hedged item are recognised in the same period, or in a matching way. The aim is that the financial statements show the effect of risk management activities. Ind AS 109 treats it as a choice. If the entity does not meet the qualifying criteria, or does not want to apply it, the normal rules apply.

The scope point is important. Ind AS 109 sets the hedge accounting requirements, and Ind AS entities apply Chapter 6 of Ind AS 109 for hedge accounting. Ind AS 39 is no longer in force, so its hedge accounting rules cannot be applied. The hedge accounting rules cover the three types of hedge: fair value hedge, cash flow hedge and hedge of a net investment in a foreign operation. Not every risk position or instrument qualifies. The qualifying instruments and items, and the criteria, are separate topics.

Disclosure is covered by Ind AS 107. The objective for hedge accounting disclosures in para 21A is to enable users to understand (a) how the entity manages risks and its risk management strategy, (b) how hedging affects the amount, timing and uncertainty of its future cash flows, and (c) the effect of hedge accounting on the balance sheet, the statement of profit and loss and the statement of changes in equity. Paras 22A to 24G give the detailed requirements. Para 21A applies to risk exposures an entity hedges and for which it elects hedge accounting.

So remember a chain: risk, hedge, mismatch, optional hedge accounting if criteria are met, then disclosure of risk management and effects.

Key rules to remember

Why hedge accounting exists
Accounting mismatch = hedging instrument measured at FVTPL, but hedged item not measured or recognised in the same way or period
Hedge accounting removes the timing mismatch. It does not remove the economic risk.
Nature of hedge accounting
Hedge accounting = optional treatment, available only if the Ind AS 109 qualifying criteria are met
It is not automatic and is not allowed merely because a derivative is held.
Types of hedge
Fair value hedge | Cash flow hedge | Hedge of a net investment in a foreign operation
The scope and objective apply to all three. Accounting differs by type.
Ind AS 107 para 21A objective
Users understand: (a) how the entity manages risk (risk management strategy) + (b) how hedging affects the amount, timing and uncertainty of future cash flows + (c) the effect of hedge accounting on the balance sheet, profit and loss and equity statement
Applies to risk exposures the entity hedges and for which it applies hedge accounting. The detailed requirements are in paras 22A to 24G.

How to solve Hedge Accounting Objective and Scope questions

Use this method for any question on the objective, scope or disclosure objective of hedge accounting.

  1. 1Identify the risk exposure in the case, such as foreign exchange, interest rate or commodity price.
  2. 2Identify the hedging instrument and the hedged item, and note how each is normally measured.
  3. 3Show the mismatch: say which one goes to profit or loss now and which does not, or does so later.
  4. 4State that hedge accounting is optional and available only if the Ind AS 109 qualifying criteria are met. Check whether the entity has designated the hedge.
  5. 5Name the type of hedge the facts point to: fair value, cash flow or net investment.
  6. 6If disclosures are asked, state the Ind AS 107 para 21A objective: risk management strategy, effect on future cash flows, and effect on financial statements.
  7. 7Conclude clearly: hedge accounting applies or does not apply, and why.

Quickest way: Mismatch, option, objective in three lines

When to use it: Use for short theory questions and case MCQs asking why hedge accounting is used or what para 21A requires.

  1. Line 1: name the mismatch (instrument at FVTPL, item not matched in timing).
  2. Line 2: say hedge accounting is optional, needs qualifying criteria and designation, and covers three hedge types.
  3. Line 3: state the para 21A objective in one sentence: users understand the entity's risk management and its effect on cash flows and on the financial statements.

Common mistakes in Hedge Accounting Objective and Scope

  • Saying hedge accounting is mandatory whenever a derivative is held.

    Students link a derivative with hedging and assume the treatment follows automatically.

    Fix: State that it is optional and needs designation and meeting the qualifying criteria. Otherwise the derivative is at FVTPL under normal rules.

  • Saying the purpose is to eliminate the economic risk.

    The word hedge suggests risk removal.

    Fix: The economic risk is reduced by the hedge itself. Hedge accounting only fixes how gains and losses are shown.

  • Writing that hedge accounting applies to any item the company wants to hedge.

    Students ignore the eligibility conditions for instruments and items.

    Fix: Say that only eligible hedging instruments and hedged items, meeting the criteria, qualify.

  • Mixing the Ind AS 107 para 21A objective with general risk disclosures.

    Both are in Ind AS 107 and sound alike.

    Fix: Para 21A is about hedge accounting disclosures only: risk management strategy, effect on future cash flows, and effect on the financial statements.

  • Quoting the old Ind AS 39 hedge rules as the main answer.

    Older notes and textbooks still use them.

    Fix: Answer under Ind AS 109 Chapter 6 only. Ind AS 39 is no longer in force, so its hedge rules cannot be applied by an Ind AS company.

Worked examples

Example 1

Alpha Ltd, an Ind AS company, will import machinery in three months and will pay USD 1,00,000. To fix its rupee cost, it enters a forward contract to buy USD at a fixed rate. The forward is measured at fair value through profit or loss. The management asks: why would Alpha consider hedge accounting, and is it compulsory?

Show the solution
  1. Risk: rupee cost of the USD payment may rise if USD strengthens.
  2. Hedging instrument: the forward contract, measured at FVTPL, so its fair value changes go to profit or loss each period.
  3. Hedged item: the highly probable future purchase. Its cost is not yet recognised, so no offsetting gain or loss appears in profit or loss.
  4. Mismatch: the forward's gain or loss hits profit or loss now, while the offsetting effect on the purchase comes later. Profit is volatile despite the economic hedge.
  5. Hedge accounting removes this by matching the timing of the effects. Here this is a cash flow hedge.
  6. It is optional. Alpha can apply it only if it designates the hedge and meets the Ind AS 109 qualifying criteria. Otherwise normal FVTPL accounting continues.

Answer: Alpha would consider hedge accounting to remove the accounting mismatch between the forward (FVTPL) and the unrecognised future purchase. It is not compulsory; it applies only if the hedge is designated and meets the qualifying criteria.

Example 2

Beta Ltd has applied hedge accounting to its interest rate hedge and also hedges commodity prices but has chosen not to apply hedge accounting to those. The CFO asks which hedges Ind AS 107 para 21A disclosures cover, and what the disclosure objective is.

Show the solution
  1. Para 21A applies to risk exposures that an entity hedges and for which it elects to apply hedge accounting.
  2. The interest rate hedge, with hedge accounting applied, is covered.
  3. The commodity hedges without hedge accounting are not covered by para 21A. They fall under the other Ind AS 107 disclosures for financial instruments.
  4. The objective is to enable users to understand (a) how Beta manages risk and its risk management strategy, and (b) how hedging affects the amount, timing and uncertainty of its future cash flows.
  5. It also covers (c) the effect that hedge accounting has had on the balance sheet, statement of profit and loss and statement of changes in equity.
  6. The detailed disclosure requirements that deliver this objective are in paras 22A to 24G.

Answer: Para 21A disclosures cover only the interest rate hedge, because hedge accounting is applied to it. The objective is to let users understand how Beta manages risk, how hedging affects the amount, timing and uncertainty of future cash flows, and the effect of hedge accounting on the balance sheet, profit and loss and equity statement. Paras 22A to 24G give the detailed requirements.

Exam tips

  • In a theory question, start with the accounting mismatch. Examiners reward that link between purpose and treatment.
  • Always say hedge accounting is optional and needs designation and qualifying criteria. This one line often earns a mark.
  • For para 21A, write its three parts: risk management strategy, effect on future cash flows, effect on the financial statements.
  • In case MCQs, check whether the entity has actually applied hedge accounting before deciding that the para 21A disclosures apply.
  • Use Ind AS 109 and Ind AS 107 terms only, and do not slip in Ind AS 39 rules.

Practice questions from Hedge Accounting

Hedge Accounting Objective and Scope in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Hedge Accounting Objective and Scope: frequently asked questions

What is the objective of hedge accounting under Ind AS 109?

The objective is to represent in the financial statements the effect of an entity's risk management activities that use financial instruments to manage exposures. It does this by matching the recognition of gains and losses on the hedging instrument and the hedged item. This removes the accounting mismatch.

Is hedge accounting compulsory under Ind AS 109?

No. It is optional. An entity can apply it only if the hedging relationship is designated and meets the qualifying criteria. If not, the derivative is generally measured at FVTPL under the normal rules.

What does Ind AS 107 para 21A require?

It sets the objective of hedge accounting disclosures. The entity should help users understand how it manages risk, how hedging affects the amount, timing and uncertainty of future cash flows, and what effect hedge accounting has had on its financial statements.

Why is hedge accounting needed if the hedge already offsets the risk?

The economic offset exists, but the accounting may not show it. The derivative is at fair value through profit or loss, while the hedged item may be at cost or not yet recognised. Hedge accounting aligns the timing so that profit is not distorted.