How to apply Hedge Accounting under IFRS 9 and ASC 815: Types of hedges, documentation, and effectiveness testing
- Graziano Stefanelli
- Sep 18
- 4 min read
Hedge accounting enables entities to align the accounting impact of hedging instruments with the exposure being hedged, reducing artificial volatility in profit or loss. Both IFRS 9 and ASC 815 (Derivatives and Hedging) provide detailed frameworks for qualifying hedge relationships, but they differ significantly in terms of flexibility, complexity, and effectiveness criteria. IFRS 9 introduces a more principles-based, risk management-aligned approach, while US GAAP remains rules-intensive, with numerous specific hedge types and documentation requirements.
Hedge accounting links a hedging instrument to a hedged item to reduce income volatility.
In a typical hedge accounting relationship, an entity designates a hedging instrument (usually a derivative) to offset the changes in fair value or cash flows of a hedged item (such as a forecast transaction, firm commitment, or recognized asset or liability).
The purpose is to ensure that gains or losses on the hedging instrument are recognized in the same reporting period and income statement section as the item being hedged. Without hedge accounting, derivatives are measured at fair value through profit or loss, which may not align with the timing of the hedged exposure’s recognition.
Both IFRS 9 and ASC 815 require:
Formal documentation of the hedge relationship
Clear identification of the risk being hedged
Regular effectiveness assessments
There are three main types of hedge accounting relationships.
Fair value hedges impact both the hedging instrument and hedged item in profit or loss.
Cash flow hedges defer effective hedge gains/losses in OCI until the hedged item affects P&L.
Net investment hedges treat the effective portion like a cash flow hedge, with gains/losses in OCI and recycled upon disposal of the foreign operation.
IFRS 9 offers more flexibility in hedge designation and effectiveness testing.
IFRS 9:
Emphasizes alignment with risk management strategy.
Allows designation of component risks (e.g., only interest rate risk or only FX risk).
Accepts a broader range of instruments and risk exposures.
No strict quantitative threshold for effectiveness (previous 80–125% range removed).
Effectiveness testing under IFRS 9 focuses on:
Economic relationship between hedged item and instrument
Credit risk not dominating value changes
Hedge ratio consistent with risk management
ASC 815:
Retains a rules-based, prescriptive approach.
Requires strict documentation at hedge inception.
Historically required 80–125% effectiveness range (now more flexible under ASU 2017-12).
Detailed treatment of each hedge type, with prohibited hedges (e.g., components not allowed unless criteria are met).
Documentation and designation must occur at hedge inception.
Both IFRS and US GAAP require that the hedge relationship be documented at inception. This includes:
Identification of the hedging instrument
The hedged item
The risk being hedged
The type of hedge relationship
The method used for measuring effectiveness
US GAAP is more prescriptive, requiring detailed calculations and periodic reassessments depending on hedge type. IFRS allows more qualitative methods, particularly for straightforward hedge relationships with observable pricing.
Accounting for fair value hedges involves symmetric P&L recognition.
For fair value hedges, both frameworks recognize:
The derivative at fair value through profit or loss
The hedged item's carrying amount is adjusted for the change in fair value attributable to the hedged risk
This ensures that both sides of the hedge relationship affect P&L in the same period, achieving the intended offset.
In IFRS, the fair value adjustment is part of the asset/liability, while in US GAAP it may be presented as a separate line or combined depending on policy.
Accounting for cash flow hedges defers gains/losses in OCI.
In cash flow hedges, the effective portion of the derivative's gain or loss is:
Deferred in OCI under both IFRS and US GAAP
Recycled to profit or loss when the forecast transaction occurs
The ineffective portion (if any) is immediately recognized in profit or loss.
For example:
Hedging forecasted purchase of inventory → OCI reclassified into Cost of Goods Sold
Hedging forecasted interest payments → OCI reclassified into Finance Expense
US GAAP requires more disaggregation of OCI reclassification, while IFRS allows some flexibility.
Net investment hedges protect foreign currency exposure in foreign subsidiaries.
These hedges:
Are applied to net investments in foreign operations
Use instruments such as foreign currency borrowings or derivatives
Recognize effective portion of gain/loss in OCI (currency translation adjustment)
Reclassify to profit or loss only upon full or partial disposal of the net investment
This treatment is identical under IFRS and US GAAP.
Key differences between IFRS 9 and ASC 815 in hedge accounting.
Hedge accounting under IFRS 9 and ASC 815 helps entities better reflect their risk management activities in the financial statements. While both frameworks aim to match hedge results with exposures, IFRS 9 provides greater flexibility and alignment with real-world practice, whereas US GAAP imposes more documentation and quantitative effectiveness requirements, though recent amendments have narrowed the gap.
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