The new phase of hedge accounting made risk management simple

Organizations are prone to various risks such as interest rate risk, Forex risk, price risk, credit risk etc, which results in income volatility. Companies seek to cover these risks by using derivatives. Derivatives are financial instruments that derive their value overtime from the performance of an underlying asset. This strategy of using derivatives to mitigate risk is known as ‘Hedging’. The use of derivatives has increased over a period of time due to which the thirst for accounting was aroused. International Accounting Standard 139 was referred as an accounting revolution which made an effort to bring about 'Accounting for Derivatives'. The objective of IAS 39 was to lay down the rules for presenting derivatives in the account. Before the issuance of IAS 39, derivatives were recorded off-balance sheet, thus companies were able to reflect minor affects of risk management. IAS 39 has been criticized as difficult to understand, apply and interpret, thus a complex model, which failed to reflect the risk management strategies. It was excessively rule based, which resulted in arbitrary outcome. To address these observations & in response to the global financial crisis, 2008; IAS entrained on a project to replace IAS 39 with new financial instrument standard IFRS 9 Financial instruments. In 2013 IFRS 9 is now ready for implementation. This paper is attempted to discuss the overview of hedge accounting & its newer version.