Theoretical Aspects of Hedge Accounting in Non-Financial Institutions: Problematic Field and Potential Effects

The paper contains the results of a study of problematic aspects and potential effects associated with the use of hedge accounting by non- financial institutions. The relevance of the study is because hedge accounting allows to ensure that income and expenses for the object and hedging instrument match but its use is the choice of the organization. Therefore, the works’s aim is to conduct a comprehensive study of the effects and problems associated with the use of hedge accounting and develop recommendations for assessing the need for usage in non-financial organizations. The author identified the following tasks for this goal achievement: studying the practice of applying hedge accounting by Russian companies; analysis of potential effects from the use of this toolkit; consideration of problematic aspects related to the application of hedge accounting; method development for determining the need for its use in non-fi institutions. The theoretical and methodological basis of the study are the provisions of IFRS and US GAAP in terms of accounting for derivatives and hedging, fair value assessment and disclosure, literature on their practical application, as well as reporting by Russian companies compiled in conformity with IFRS. In the work’s course, the author revealed that only half of the hedger companies from the considered sample apply hedge accounting. For understanding motives of organizations to use this toolkit or abandon it, the author identified the potential positive effects associated with it and problematic aspects. Also, they proposed a methodology for determining the need for its use, which would be useful for consulting companies when they provide services in risk hedging.

1. Plotnikova O. V. Accounting for hedging by futures operations. Mezhdunarodnyi bukhgalterskii uchet = International Accounting. 2012;(31):17–25. (In Russ.).

2. Plotnikov V. S., Plotnikova O.V. Cash flow hedge accounting principles.Vse dlya bukhgaltera = Everything for an accountant. 2016; 2(286):25–31. (In Russ.).

3. Plotnikova O.V. Cash flow hedge accounting for option transactions. Mezhdunarodnyi bukhgalterskii uchet = International Accounting. 2013;12(258):11–17. (In Russ.).

4. Safonova T. Operations with derivative financial instruments: accounting, taxes, legal regulation. Moscow: Alpina Pablishing Group; 2013. 441 p. (In Russ.).

5. Kuzmin A. Yu. Issues of hedge accounting in IFRS in consolidated financial statement. Uchet. Analiz. Audit = Accounting. Analysis. Auditing. 2019;6(1):40–49. (In Russ.).

6. Kuzmin A. Yu. The accounting procedure for hedging financial schemes with non-derivative instruments in accordance with IFRS. Uchet. Analiz. Audit = Accounting. Analysis. Auditing. 2019;6(4):53–60. (In Russ.).

7. Mikhailov A. Yu. Methods for evaluating the effectiveness of hedges based on SFAS 133. Finansovaya analitika: problemy i resheniya = Financial analytics: problems and solutions. 2012;26:40–44. (In Russ.).

8. Köchling G., Posch P. N. How Does Hedge Accounting Infl e Firm Value. 2018. Available at SSRN. URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3128333

9. Bartram S.M. Corporate hedging and speculation with derivatives. Journal of Corporate Finance. 2017.

10. Jankensgård H., Alviniussen A., Oxelheim L. Hedge Accounting Explained: Corporate Foreign Exchange Risk Management. John Wiley&Sons Ltd; 2020:105–126.

11. Beneda N. Does Hedge Accounting Under SFAS 133 Increase the Information Content of Earnings: Evidence From the U.S. Oil and Gas Industry. Journal of Corporate Accounting & Finance. 2016;(27):11–20.

12. Pierce S. Determinants and Consequences of Firms’ Derivative Accounting Decisions. Journal of Financial Reporting. 2020;5(1):81–114.

13. Zhang, H. Effect of derivative accounting rules on corporate risk management behavior. Journal of Accounting and Economics. 2009;(47):244–264.

14. Modigliani F., Miller M. H. The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review. 1958;48(3):261–297.

15. Smith C., Stulz R. The Determinants of Firms’ Hedging Policies. The Journal of Financial and Quantitative Analysis. 1985;20(4):391–405.

16. Pan’kov P. I. The impact of hedging on company value. Economic growth of the Republic of Belarus: globalization, innovation, sustainability. Proc. international sci. and pract. conf. (Minsk, May 14, 2020) Minsk: BSE; 2020:47–48. URL: http://edoc.bseu.by:8080/handle/edoc/83394 (In Russ.).

17. Hahnenstein L., Köchling G., Posch P. Do firms hedge in order to avoid financial distress costs? New empirical evidence using bank data. Journal of Business Finance & Accounting. 2020;48(9):1–24.

18. Mas’ko L.V., Pan’kov P.I. Interdependence of the investment attractiveness of the organization and hedging. Vestnik Polotskogo gosuniversiteta. Seriya. D. Ekonomicheskie i yuriicheskie Nauki = Bulletin of Polotsk State University. Part D. Economic and legal sciences 2018;(5):39–45. (In Russ.).

19. Hairston S.A., Brooks M. R. Derivative accounting and financial reporting quality: A review of the literature. Advances in Accounting. 2019;(44):81–94.

20. Guyader L. P. Can Accountants Understand Derivatives? Journal of Corporate Accounting & Finance. 2013;24(6):49–54.

21. Guyader L.P. Artificial intelligence in accounting: GAAP’s “FAS 133”. 2020;31(3):185–189.

22. Campbell J., Downes J., Schwartz W. Do Sophisticated Investors use the Information provided by the Fair Value of Cash Flow Hedges? Review of Accounting Studies. 2015;20(2):934–975.

23. Chang H.S., Donohoe M., Sougiannis T. Do analysts understand the economic and reporting complexities of derivatives? Journal of Accounting and Economics. 2016;61(2–3):584–604.

24. Ramirez J. The Theoretical Framework — Hedge Accounting: chapter in Accounting for Derivatives: Advanced Hedging under IFRS 9, Second Edition. John Wiley & Sons; 2015. 792 с.