Accounting for corporate finance: hedging: categories of hedge
This guidance applies to companies which apply IFRS, New UK GAAP or FRS 26.
Categories of hedging relationships
The accounting standards defines three categories of hedging relationships:
- Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability; an unrecognised firm commitment; or an identified portion of an asset, liability or firm commitment that is attributable to a particular risk and could affect profit and loss.
- Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable either to a particular risk associated with an asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable future transaction and which could affect profit and loss.
- Hedge of a net investment in a foreign operation: a hedge of the exposure that the carrying amount of a net investment in a foreign operation will change in response to foreign exchange movements.