CHAPTER 2

Hedge Criteria and Effectiveness

About This Chapter

Hedge documentation is necessary at the inception of the hedged transaction to qualify for the favorable accounting treatment allowed by accounting guidance for hedge transactions. The favorable treatment is that the hedging gains and losses from the derivative instrument appear in the income statement at the same time as fair value changes to the hedged item are recorded in the financial statements. It is this symmetry of recording offsetting gains or losses on the derivative instrument with gains or losses from the hedged item (existing asset, liability, firm commitment, or forecasted cash flows that are probable of occurring) that makes hedge accounting attractive as a way to manage ...

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