What is Hedge Accounting?
Hedge accounting is an optional set of rules under IFRS 9 that aligns the timing of profit or loss recognition between a hedging instrument (typically a derivative) and the hedged item (an asset, liability, or forecast transaction).
How It Works
- Document the hedging relationship — hedged item, instrument, risk, and effectiveness test.
- Choose one of three hedge categories — fair value hedge, cash flow hedge, or hedge of a net investment.
- Re-measure the hedging instrument to fair value each period.
- Recognise effective portions of the change in OCI (cash flow hedge) or P&L (fair value hedge).
- Reclassify amounts from OCI to P&L when the hedged item affects profit.
Saudi Context
Tadawul-listed Saudi companies hedging foreign currency and commodity exposures use IFRS 9 hedge accounting through SAMA-licensed banks. The detailed documentation is reviewed by external auditors registered with SOCPA.
Example
A company hedges a forecast SAR 50M raw material purchase with a commodity forward. Effective changes in the forward’s fair value go to OCI; on purchase, the cumulative gain or loss is transferred from OCI to inventory cost.