A hedging is making an investment or acquiring some derivative or non-derivative instruments in order to offset potential losses (or gains) that may be incurred on some items as a result of particular risk.
A hedge accounting means designating one or more hedging instruments so that their change in fair value offsets the change in fair value or the change in cash flows of a hedged item.
Hedge accounting rules in IAS 39 are too complex and strict. Many companies that actively pursued hedging strategies could not apply hedge accounting in line with IAS 39 because the rules did not allow it.
As a result, new hedging rules in IFRS 9 were issued.
What do IAS 39 and IFRS 9 have in common:
1. Optional: A hedge accounting is an option, not an obligation — both in line with IAS 39 and IFRS 9.
2. Terminology: Both standards use the same most important terms: hedged item, hedging instrument, fair value hedge, cash flow hedge, hedge effectiveness, etc.
3. Hedge documentation: Both IAS 39 and IFRS 9 require hedge documentation in order to qualify for a hedge accounting.
4. Categories of hedges: Both IAS 39 and IFRS 9 arrange the hedge accounting for the same categories: fair value hedge, cash flow hedge and net investment hedge.
5. Hedge ineffectiveness: Both IAS 39 and IFRS 9 require accounting for any hedge ineffectiveness in profit or loss.
6. Use of written options as hedging instruments is prohibited by both standards.
Differences in hedge accounting between IAS 39 and IFRS 9
Under new IFRS 9 rules, you can apply hedge accounting to more situations as before because the rules are more practical, principle based and less strict.