Search results for "Basis risk"

Hedge Effectiveness Testing as a Screening Mechanism for Hedge Accounting

2014

Accounting for financial instruments has been subject to much controversy, particularly accounting practices related to derivatives held for hedging purposes. For cash flow hedges, poor matching may result when fair-value accounting is prescribed for the hedging instrument and historical cost is prescribed for the assets that generate the “highly probable forecast transaction” to be hedged. Fair-value accounting may therefore induce excess variations in earnings, which could make a firm appear to be more risky than it actually is. The alternative to fair-value accounting offered by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to fi…