The term "hedging" describes the securing of an unsettled position by setting up an offsetting position. "Hedge accounting" is the term used when opposing value developments for a hedged item subject to a risk and a hedging instrument are offset in accounting practice. The aim of hedge accounting is to eliminate the net influence on the profit and loss account. Comprehensive regulations on hedge accounting are required due to the valuation concept in IAS 39 and IFRS 9, which values some financial instruments at fair value and some at amortised cost, and also due to the different effects on profit and loss. Some sections of IAS 39 were revised and extended in IFRS 9.

While the general rules for valuation call for hedging derivatives to be recognised at fair value and for value adjustments to be captured as directly affecting net income, changes in fair value – in so far as they lead to a book value that lies above the cost of purchase – are to be recognised as not affecting net income. If there were no accounting regulations, hedging relationships would lead to uneven P&L effects in this case. Therefore, the aim of the hedge accounting regulations in IAS 39 and IFRS 9 is to capture the value changes of the hedging instruments and the hedged items as largely compensating each other and as affecting or not affecting net income to the same degree.

The FlexFinance hedge solution fully supports the hedge management requirements of IFRS and reduces the P&L effects of the Mixed Model Approach.
The FlexFinance blueprint for Hedge offers users a solution that covers the full lifecycle of a hedge from designation to termination.
It fully supports IFRS requirements for documentation and the audit trail of a hedge relationship.
The effectiveness test can be carried out daily and its results can be tracked to the individual deal level via drilldown. The effectiveness tests can also be manually overridden whenever ineffectiveness should occur.

The blueprint “Hedge” entails the following components.


     Diagram: Valuation elements supported by FlexFinance Hedge.

1. Prospective test:          

2. Retrospective test:

   Different hedge types are permitted under hedge accounting. Jabatix supports the creation of

                       - Cash Flow Hedges

A future cash flow that is safeguarded against certain risks that might affect profit or loss is defined as a cash flow hedge.

A typical example of a cash flow hedge is the safeguarding of interest payments for a variable-rate bond by a receiver interest rate swap which entails transforming the future variable interest payments into payments with a fixed amount.

The accounting practice in the Jabatix Hedge Manager for hedged items and hedging instruments in a cash flow hedge fulfils the requirements for Hedge Accounting under IFRS. The hedged item is still valued and accounted for in accordance with the regulations in force while the hedging instrument is designated at full fair value and is disclosed at this value on the balance sheet.

Fair Value Hedges

        A fair value hedge entails safeguarding against fair value changes in hedged items and hedging instruments. The following are to be recognised in profit or loss:

The following table shows hedged risks and hedging instruments for loans support by FlexFinance Hedge 

  Diagram: Hedge Types for loans supported by FlexFinance Hedge.

This also applies if the hedged deal is also otherwise valued at amortised cost or the value changes are captured as not affecting net income in the revaluation reserve.

The value changes of the hedging instrument and the hedged item are therefore recognised (largely compensated) on the balance sheet as affecting net income.

Safeguards against different types of risk can be implemented for one hedge. FlexFinance supports hedging against the following types of risk: