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 −

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