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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Accounting for corporate finance: hedging: overview of hedge accounting

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)

The 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)

The 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 reserve’ (shown as ‘other comprehensive income’). These 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)

The accounting is similar to a designated cash flow hedge.