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I understand the purpose of a fair value hedging instrument (preserve the fair value of an asset, liability, etc) and a speculation derivative (default classification if the derivative isn't documented as hedge accounting derivative). Please correct me if I'm wrong.

What I don't understand is the difference at the accounting level. As far as I understand, they both are valued at fair value (mtm) and the differences of mtm between financial statements are reported in the company results. So, If they have the same accounting effects, Why would I bother to do all the documentation and effectiveness tests?

I'm quite new to this topic, and I'm learning it in Spanish, please let me know if I'm using wrong words.

closed as off-topic by Chris W. Rea, Grade 'Eh' Bacon, Nathan L, Nosrac, Michael Jul 26 '17 at 13:06

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  • Which standard are you referencing ? US GAAP, IFRS... ? – ApplePie Jul 23 '17 at 2:52
  • I'm referencing IFRS 9 – Oliver Mohr Bonometti Jul 23 '17 at 2:59
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There are some differences. I will be referencing to chapter 6 of IFRS 9.

Hedged asset

A fair value hedge must follow the valuation of its hedged asset. This means that for assets valued at fair value through other comprehensive income (FVOCI), the fair value hedge would also be at FVOCI and vice versa for fair value through P&L (FVTPL). Specualtive derivatives would always be at FVTPL.

(a) the gain or loss on the hedging instrument shall be recognised in profit or loss (or other comprehensive income, if the hedging instrument hedges an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5).

Presentation

The fluctuation in the value of a hedging instrument must be presented with that of its hedgee. This does not change the bottom line but helps reduce the variability in the line item in which the hedgee belongs.

(b) the hedging gain or loss on the hedged item shall adjust the carrying amount of the hedged item (if applicable) and be recognised in profit or loss.

Qualification

There are a number of rules governing the use of hedge accounting, including declaring that an instrument is an hedge at inception, documenting the hedge and its effectiveness, etc. This is not necessary for a trading derivative.

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