Jiri Strouhal, Ph.D., Department of Financial Accounting and Auditing, University of Economics Prague, W. Churchill Square 4, Prague, 130 67, Czech Republic
Hedge accounting is a phenomenon which became more and more popular during last decade. Pirchegger (2006) is concerned with the fact that accounting entities tend to note primarily the high level of disclosure obligations in relation to hedge accounting and the costs related thereto. On the other hand, the primary goal of the standard-issuing authority is the incontestable effort to provide investors with highly relevant information. The investor therefore usually lacks any information on the volumes of derivative transactions relating to the hedging of the fair value and the cash flow, respectively. Information on the method of measuring the efficiency of hedging relations and on the values of such efficiency is practically always unavailable. In addition, external users of accounting reports often find it unclear what part of the hedged nominal values was ineffective and how many hedge relations had to be terminated as a result of their ineffectiveness.
Numerous studies have dealt with the bond between the economic and the accounting concept of hedging. Melumad et al. (1999), for instance, indicates that the application of hedge accounting in compliance with the US standard SFAS 133 leads to deviations from optimum hedging in the economic sense. However, Barnes (2001) draws attention to the fact that these deviations from economic hedging are the very consequence of the set hedge accounting model, pointing out that hedge accounting may motivate poorly performing companies to speculate and influence their economic results on a short-term basis. Several studies have dealt with the information and control effects of hedge accounting (e.g. Jorgensen, 1997; Hughes et al., 2002). The most interesting finding lies in the fact that the voluntary application of hedge accounting leads to a deviation from the optimum hedging strategy (as opposed to the exclusive application of economic hedging without the application of the principles of hedge accounting). The greatest risk connected with hedge accounting seems to bee the testing efficiency of hedging relations. Not only is the majority of companies practically unable to test their hedge relations, but they also fear (not without reason) that the given efficiency test will show that hedge accounting is not effective.