Oanda corporation Revision 5

What Is Hedging? 

Basic Concept:  The forex hedge’s change in value is opposite to the change in value of the foreign 

currency exposure (hedged item). These two amounts offset each other to obtain cost certainty or 

revenue certainty. 

 

 

 

What Is Hedge Accounting?  

Hedge accounting is a privilege, not a right. It is special accounting treatment for designated hedges 

that meet the required criteria outlined in the accounting standards.  

 

In typical accounting treatment, forex hedges are carried on the balance sheet at their fair market value, 

with any changes in the carrying value impacting the income statement in each reporting period. 

Sometimes this typical treatment creates a timing mismatch in terms of when the forex hedge impacts 

earnings and when the hedged item impacts earnings. Forex hedge accounting, on the other hand, 

overrides this method of recording the impact on earnings in the reporting period because the gain/loss 

of the hedged items and the gain/loss of the forex hedge are recorded in earnings at the same time. In 

this way, hedge accounting reduces the earnings volatility caused by changes in foreign currency rates. 

 

Forex hedging accounting treatment can be relatively easy or very complex, depending on the nature of 

your company’s forex activities and its hedging products. In general, the fair market value of foreign 

currency hedges is recorded, often referred to as the "mark-to-market" position (the value of the forex 

hedge as at the financial reporting date). With forex carry spot hedges, the mark-to-market information 

is readily available. However, the more challenging component of recording the mark-to-market value 

is deciding how to record the other side of the journal entry. Some of the key standards related to forex 

hedge accounting include: 

  International Accounting Standard 39 (IAS 39), Financial Instruments: Recognition and 

Measurement 

  Financial Accounting Standard 133 (FAS 133), Accounting for Derivative Instruments and 

Hedging Activities (United States) 

FMV of Forex 

Hedge

FMV of 

Hedged Item