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While the rules for hedge accounting vary across borders, nearly universal requirements are (1) that the transactions which are part of the hedge must be designated by the enterprise as constituting risk-offsetting transactions, (2) that there must be risk reduction as a result of the combined transactions and (3) that there must be correlation between the underlying transaction and the risk management transaction taken as a hedge. The purpose of hedge accounting is to provide a match of related gains and losses and to avoid distorting financial reports. The Securities and Exchange Commission and members of the Financial Accounting Standards Board are engaged in complex discussions over some aspects of the use of hedge accounting in financial reporting. This discussion may lead to differences between the economic effect of a risk management transaction and its reflection in financial reports. The growth in mark-to-market accounting worldwide is leading to a reduction in hedge accounting applications.
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