Hedge Accounting Versus No Hedge Accounting for Cash Flow Hedges

27 Pages Posted: 9 Apr 2004

See all articles by Barbara Pirchegger

Barbara Pirchegger

Otto-von-Guericke-Universit├Ąt Magdeburg - Institute of Economics and Business Administration

Date Written: April 2004

Abstract

US-GAAP as well as IAS (IFRS) specify specific accounting regulations for hedging activities. Basically the hedge accounting rules ensure that an offsetting gain or loss from a hedging instrument affects earnings in the same period as the gain or loss from the hedged item.

However, the way hedge accounting rules are set up, their application turns out to be an option rather than an obligation for firms. Recognizing this fact the paper analyzes corporate incentives to use hedge accounting rules for cash flow hedges. We find that in a two period LEN-type agency model with a risk averse principal and a risk averse agent, it almost always benefits the principal not to use hedge accounting even though it is useful to hedge. The result stems from the fact that hedge accounting concentrates risk in the second period while no hedge accounting spreads risk over both periods. Spreading risk gives rise to a more efficient risk sharing between the agent and the principal as two compensation rates are available for that purpose compared to only one in a hedge accounting setting.

Keywords: Hedge Accounting, Agency Theory

JEL Classification: M41, M44, D82

Suggested Citation

Pirchegger, Barbara, Hedge Accounting Versus No Hedge Accounting for Cash Flow Hedges (April 2004). Available at SSRN: https://ssrn.com/abstract=526962 or http://dx.doi.org/10.2139/ssrn.526962

Barbara Pirchegger (Contact Author)

Otto-von-Guericke-Universit├Ąt Magdeburg - Institute of Economics and Business Administration ( email )

Universitaetsplatz 2
Magdeburg, 39016
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,355
Abstract Views
8,699
rank
16,464
PlumX Metrics