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What is accounting entries for fair value hedge?
Hedging an asset or liability limits the exposure to extreme changes in its value. Hedging is done to mitigate the risk of loss. Any gain arises through hedging instrument will uplift the item in the financial statement (in case of asset value falls drastically).
Accounting for fair value hedges is done by company with respect to exposure of fair value change of item. This item can be asset or liability to company and can be attribute to particular risk which result in generating profit or loss to company
Steps involved in fair value hedge accounting
Fair value of hedged item and hedging instrument is determined
Change (if there is any) in fair value hedge instrument is recognized in P&L books of accounts
Hedging gain/loss on hedge item is recognized in its carrying amount
The accounting entries for fair value hedge are explained below −
| Particulars | Debit | Credit |
|---|---|---|
For hedging instruments | ||
| If there is any loss | In profit and loss account, fair value loss on hedging instrument. | In balance sheet, financial liabilities from hedging instruments. |
| If there is any gain | In balance sheet, financial assets from hedging instruments. | In profit and loss, fair value gain on hedging instrument. |
For hedging items | ||
| If there is any loss | In profit and loss account, loss on hedged item. | In balance sheet, hedging item. |
| If there is any gain | In balance sheet, hedged item. | In profit and loss, gain on hedged item. |
Net effect on both | ||
| Net loss | Decrease in company’s overall profit | Reduction in company net assets |
| Net gain | Net Increase in company net assets | Increase in Overall company’s profit |
Conclusion
Hedging helps in protecting asset value and getting into a position that results in stability thereby financial statements have no or less impact. The performance of hedged instruments decides whether the entered hedging position was fruitful and minimizes the risk. If hedging performance was poor then it results in magnified or heavy losses
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