# Hedge Accounting Explained: IFRS 9 vs ASC 815

Source: https://gravam.com/blog/hedge-accounting-explained
Author: Tan Gravam
Published: 2026-07-23
Updated: 2026-09-25
Reviewed: 2026-09-25
Summary: Hedge accounting under IFRS 9 and ASC 815: the three hedge types, designation, effectiveness, rebalancing, de-designation and cost of hedging, compared.

**Hedge accounting is an optional accounting treatment that aligns the timing of gains and losses on a hedging instrument with the item it hedges, so the income statement shows that the two offset.** A [derivative hedge](https://gravam.com/blog/fx-hedging-instruments-forwards-options-swaps) is normally marked to market through profit every period, while the exposure it hedges often isn't recognised yet, and reported profit swings even though the company is economically protected. Hedge accounting removes that mismatch in exchange for formal documentation and [effectiveness evidence](https://gravam.com/blog/hedge-effectiveness-testing). The two frameworks treasurers actually meet, **IFRS 9** and US GAAP's **ASC 815**, agree on the idea and disagree on a surprising number of mechanics, and those mechanics decide whether a hedge programme reports cleanly.

_(This is a conceptual explanation, not accounting advice. The rules live in IFRS 9 and ASC 815, and applying them to your book needs your accountants.)_

## The problem it solves

Take a forecast foreign-currency sale hedged with a forward. Economically you're protected: whatever the currency does, the forward offsets it. In the accounts the forward is a derivative, measured at fair value through P&L each period, while the sale hasn't happened, so nothing sits on the other side of the reporting. Profit now moves with the currency quarter by quarter, even though you deliberately removed that risk.

> Without hedge accounting, doing the economically right thing can make reported profit look more volatile, not less. The hedge works; the accounts just don't show it yet.

Hedge accounting fixes the timing: it defers or relocates the instrument's gains and losses so they land in profit at the same time as the hedged item's, and the two cancel in the numbers the way they cancel in the economics. For hedges of balances already on the balance sheet the problem often doesn't arise, because the item and the derivative already move through profit together, as [balance sheet FX hedging](https://gravam.com/blog/balance-sheet-fx-hedging) explains.

## The three hedge types and where the offset lands

Both standards use the same three relationships. What differs is how cleanly each one reports.

| Hedge type | What it hedges | IFRS 9 | ASC 815 (after ASU 2017-12) |
| --- | --- | --- | --- |
| **Fair value hedge** | Changes in the fair value of a recognised asset or liability or a firm commitment, e.g. fixed-rate debt | Instrument and the hedged item's change for the hedged risk both go to P&L, so they net | Same principle; the instrument's change included in the effectiveness assessment is presented in the same income-statement line as the hedged item |
| **Cash flow hedge** | Variability in future cash flows, e.g. a forecast FX sale or floating-rate interest ([interest rate hedges](https://gravam.com/blog/interest-rate-hedging-swaps-caps-collars)) | Effective portion to OCI (the cash flow hedge reserve, capped at the lower of the instrument's and the hedged item's cumulative change), ineffectiveness to P&L; released when the hedged cash flow affects profit | The whole change in the instrument's fair value included in the assessment goes to OCI, with no separate ineffectiveness line; reclassified to the hedged item's line when the transaction affects earnings |
| **Net investment hedge** | The currency exposure of a net investment in a foreign operation, a [translation exposure](https://gravam.com/blog/fx-risk-transaction-translation-economic-exposure) | Effective portion to OCI with the translation differences; reclassified on disposal of the operation | Recorded in the cumulative translation adjustment in OCI; ASU 2017-12 also dropped separate ineffectiveness measurement here |

One difference hides inside the cash flow row. When a hedged forecast purchase results in a non-financial asset (inventory, equipment), IFRS 9 removes the reserve and puts it into the asset's initial cost, a **basis adjustment** that 6.5.11 says is not a reclassification. US GAAP makes no basis adjustment: the amount stays in AOCI and is released as the asset affects earnings. PwC's comparison flags that the two routes produce different AOCI balances and different asset carrying amounts for the same hedge.

## Designation and documentation

Neither framework lets you decide after the fact that a trade was a hedge. IFRS 9 6.4.1(b) requires formal designation and documentation **at inception** of the relationship and of the entity's risk management objective and strategy, identifying the hedging instrument, the hedged item, the nature of the risk being hedged and how effectiveness will be assessed, including the analysis of sources of ineffectiveness and how the hedge ratio is set. ASC 815 also requires contemporaneous documentation at inception. ASU 2017-12 added a practical allowance: the initial prospective quantitative effectiveness assessment can be completed after designation, up to the first quarterly effectiveness assessment date. The designation itself still has to exist on day one.

What goes in the file, and why late paperwork disqualifies a sound hedge, is the subject of [hedge documentation requirements](https://gravam.com/blog/hedge-documentation-requirements).

## Effectiveness: principles versus "highly effective"

This is where the frameworks diverge most in daily work.

- **IFRS 9** has no numeric pass band. A relationship qualifies when there is an **economic relationship** between instrument and hedged item, **credit risk does not dominate** the value changes, and the **hedge ratio** matches the quantities the entity actually uses to manage the risk. Ineffectiveness is still measured and booked; it just doesn't decide eligibility on its own.
- **ASC 815** requires the relationship to be **highly effective** at inception and on an ongoing basis. The standard never quantifies that, but US practice reads it as offset between 80% and 125%, per the Deloitte roadmap. ASU 2017-12 requires an initial quantitative test (dollar-offset or regression) unless an expedient such as the shortcut method or critical-terms match applies, and then lets an entity elect, hedge by hedge at inception, to assess effectiveness **qualitatively** afterwards if it can reasonably support an expectation of high effectiveness.

So an IFRS reporter asks "is this still an economic hedge at the ratio we manage to?", while a US GAAP reporter asks "is it still highly effective?", and after ASU 2017-12 that is often a documented qualitative answer rather than a quarterly calculation. The worked arithmetic, including the small-denominator trap that fails sound hedges under a bright line, is in [hedge effectiveness testing and the hedge ratio](https://gravam.com/blog/hedge-effectiveness-testing), and the [Hedge Effectiveness Checker](https://gravam.com/tools/hedge-effectiveness-checker) runs the dollar-offset calculation on your own period data.

## Rebalancing: adjusting without starting over

IFRS 9 6.5.5 introduced **rebalancing**. If the hedge ratio drifts out of line with the effectiveness requirement but the risk management objective for that designated relationship is unchanged, the entity adjusts the designated quantities of the hedged item or the instrument to restore the ratio. Rebalancing is accounted for as a **continuation** of the relationship: ineffectiveness up to that point is measured and recognised first, then the quantities change and the documentation is updated. If the objective itself has changed, rebalancing isn't available and the relationship is discontinued instead.

US GAAP has no equivalent. As KPMG's comparison puts it, a change to the hedge ratio under ASC 815 generally means de-designating the existing relationship and designating a new one, with the fresh documentation and inception testing that implies.

## You can't walk away from an IFRS 9 hedge

The mirror image of rebalancing is the ban on **voluntary de-designation**. Under IAS 39 an entity could simply revoke a designation. IFRS 9 removed that choice: a relationship that still meets its risk management objective and the qualifying criteria, after any rebalancing, cannot be discontinued at will. Hedge accounting ends only when the criteria stop being met, because the objective changed, the instrument expired, was sold or terminated, or credit risk came to dominate.

ASC 815 goes the other way. Its discontinuation guidance lists the entity **removing the designation** alongside failed criteria and an expired or terminated instrument as events that end hedge accounting prospectively, and PwC's comparison states plainly that US GAAP permits voluntary de-designation at any time after inception. For a group reporting under both, that asymmetry matters: a US GAAP book can be restructured by de-designating and re-designating; the IFRS book of the same trades cannot.

## Cost of hedging: forward points and time value to OCI

Most corporate FX hedges carry a part that has nothing to do with the hedged risk: the **forward points** of a forward, the **time value** of an option, the **currency basis spread** of a cross-currency swap. Left in the designation, that part generates ineffectiveness; excluded and marked to market, it generates P&L noise.

- **IFRS 9 6.5.15**: when only an option's intrinsic value is designated, the change in its time value **shall** go to OCI, to the extent it relates to the hedged item. For a transaction-related hedge it accumulates in equity and follows the hedged transaction (into a non-financial asset's cost, or into profit when the transaction does); for a time-period-related hedge the time value at designation is **amortised** to profit on a systematic and rational basis over the period.
- **IFRS 9 6.5.16**: when only the spot element of a forward is designated, or the currency basis spread is excluded, the entity **may** apply the same treatment to the forward element or the basis spread. Time value is compulsory cost-of-hedging treatment; forward points and basis are an election.
- **ASC 815**, after ASU 2017-12: excluded components can follow an **amortisation approach**, where the initial value is recognised in earnings on a systematic and rational basis over the instrument's life and the rest of the fair-value change sits in OCI (815-20-25-83A), or be **marked to market** through earnings (815-20-25-83B). Either way the earnings effect is presented in the same line as the hedged item.

For a forward-heavy FX programme, electing the forward-element treatment under IFRS 9, or the amortisation approach under ASC 815, is usually what turns quarterly forward-point noise into a predictable carry cost, which is how treasury thinks about it anyway.

## IFRS 9 vs ASC 815 at a glance

| Topic | IFRS 9 | ASC 815 |
| --- | --- | --- |
| Hedge types | Fair value, cash flow, net investment | Same three |
| Designation and documentation | Formal, at inception, incl. sources of ineffectiveness and hedge ratio (6.4.1(b)) | Contemporaneous at inception; initial quantitative test may follow, by the first quarterly assessment date at the latest (ASU 2017-12) |
| Effectiveness | Economic relationship, credit risk not dominant, hedge ratio as managed; no numeric band | Highly effective, read in practice as 80–125% offset |
| Ongoing assessment | Forward-looking, on an ongoing basis | Quantitative, or qualitative by election after a passed initial quantitative test |
| Cash flow hedge ineffectiveness | Measured and recognised in P&L (lower-of test) | Not separately measured; whole included change goes to OCI |
| Rebalancing | Yes (6.5.5), a continuation of the relationship | No concept; de-designate and re-designate |
| Voluntary de-designation | Prohibited while criteria are met | Permitted at any time |
| Forward points, time value, basis | Cost of hedging via OCI (time value mandatory, forward points and basis elective) | Excluded components: amortisation with OCI, or mark to market |
| Basis adjustment (non-financial item) | Yes, reserve moves into the asset's cost | No, released from AOCI as the asset affects earnings |
| Non-financial risk components | Allowed if separately identifiable and reliably measurable | Contractually specified components (ASU 2017-12), replaced by ASU 2025-09's clearly-and-closely-related model, effective for public business entities for annual periods beginning after 15 December 2026 |
| Legacy option | Policy choice to keep applying IAS 39 hedge accounting until the macro-hedging project ends (7.2.21) | Not applicable |

## Hedge accounting is not hedging

The distinction worth repeating in every policy discussion: **hedging is economic; hedge accounting is presentational.** You can hedge perfectly well without it; the protection is identical and only the smoothness of reported profit differs. Decide the hedge on the economics and the [risk policy](https://gravam.com/blog/treasury-risk-management-policy); decide hedge accounting on whether the reporting benefit is worth the documentation and testing effort. Some companies, for some exposures, reasonably choose to accept the volatility.

## Where hedge accounting breaks in practice

- **Assuming a good hedge auto-qualifies.** Without inception documentation and effectiveness evidence, a sound economic hedge still fails.
- **Documented hedge ≠ executed hedge.** A forward booked to a convenient month-end against a liquid index, when the documentation describes the actual payment date and the actual price driver, is where ineffectiveness and failed tests come from.
- **Forgetting the IFRS 9 exit is locked.** Designating broadly "to see how it goes" works under US GAAP; under IFRS 9 you can't later drop a relationship that still qualifies.
- **Ignoring forward points.** Designating the full forward and then being surprised by forward-point ineffectiveness, when the cost-of-hedging election was available at designation.
- **Letting accounting drive the hedge.** Choosing instruments for their accounting treatment rather than the exposure.

## Where it lives in SAP

In an SAP landscape the relationships, their documentation and the effectiveness runs usually sit in the Hedge Management and Accounting area of Treasury and Risk Management, with separate valuation areas carrying the IFRS and local-GAAP views of the same deals. How that is configured, and why it's harder than the deal capture, is covered in [hedge management in SAP](https://gravam.com/blog/hedge-management-in-sap) and [SAP TRM position management and valuation](https://gravam.com/blog/sap-trm-position-management-and-valuation).

Understand that hedge accounting aligns timing so the accounts show a hedge that already works; know which of the two rulebooks you report under, because rebalancing, de-designation and forward points behave differently in each; and resource the documentation and testing before you designate, not after. Then it stays what it should be, a reporting tool, rather than a driver of your risk decisions.

***

_See also [hedge effectiveness testing](https://gravam.com/blog/hedge-effectiveness-testing), [hedge documentation requirements](https://gravam.com/blog/hedge-documentation-requirements) and [what is treasury risk management](https://gravam.com/blog/what-is-treasury-risk-management)._

## Primary sources

IFRS 9 Chapter 6 (as issued by the IASB and adopted in the EU) and US GAAP ASC 815 as amended by ASU 2017-12; ASU 2025-09 is noted where it changes the comparison (effective for public business entities for annual periods beginning after 15 December 2026, one year later for others). Macro (portfolio) hedging of interest rate risk is out of scope. Claims checked on 2026-09-25 through cross-checked excerpts of the listed sources. A conceptual guide, not accounting advice.

- IFRS 9 Financial Instruments, Chapter 6 (Hedge Accounting) — full text as adopted for use in the EU by Commission Regulation (EU) 2016/2067 of 22 November 2016, OJ L 323 — EU-adopted text, OJ L 323, 29.11.2016 — accessed 2026-08-19 — https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32016R2067
- AASB 9 Chapter 6 Hedge accounting — the Australian text identical to IFRS 9 Chapter 6 (paragraphs 6.4.1, 6.5.5, 6.5.15 and 6.5.16 quoted) — accessed 2026-09-25 — https://standards.aasb.gov.au/node/4486
- PwC — Achieving hedge accounting in practice under IFRS 9 (rebalancing, prohibition of voluntary de-designation, cost of hedging, IAS 39 policy choice) — accessed 2026-09-25 — https://www.pwc.com/hu/hu/szolgaltatasok/ifrs/ifrs_9/ifrs9_kiadvanyok/achieving_hedge_accounting_in_practice_under_ifrs9.pdf
- PwC Viewpoint — IFRS and US GAAP: similarities and differences, 11.15 Voluntary dedesignation of a hedging relationship — accessed 2026-09-25 — https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/ifrs_and_us_gaap_sim/ifrs_and_us_gaap_sim_US/chapter_11_derivativ_US/1115_voluntary_dedes_US.html
- PwC Viewpoint — IFRS and US GAAP: similarities and differences, 11.13 Cash flow hedging and basis adjustments — accessed 2026-09-25 — https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/ifrs_and_us_gaap_sim/ifrs_and_us_gaap_sim_US/chapter_11_derivativ_US/1113_cash_flow_hedgi_US.html
- Deloitte Roadmap: Hedging — 3.5 Discontinuing a Fair Value Hedge (ASC 815-25-40-1, including the entity removing the designation) — accessed 2026-09-25 — https://dart.deloitte.com/USDART/home/codification/broad-transactions/asc815-10/hedge-accounting/chapter-3-fair-value-hedges/3-5-discontinuing-a-fair-value
- Deloitte Roadmap: Hedging — 2.5 Hedge Effectiveness (ASC 815 'highly effective' requirement) — accessed 2026-09-25 — https://dart.deloitte.com/USDART/home/codification/broad-transactions/asc815-10/hedge-accounting/chapter-2-hedge-accounting-requirements/2-5-hedge-effectiveness
- KPMG — Hedge accounting: IFRS Standards vs US GAAP (rebalancing and de-designation differences) — accessed 2026-09-25 — https://kpmg.com/us/en/articles/2022/hedge-accounting-ifrs-standards-gaap.html
- FASB — Accounting Standards Update 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities — accessed 2026-09-25 — https://storage.fasb.org/ASU%202017-12.pdf
- FASB — Accounting Standards Update 2025-09, Derivatives and Hedging (Topic 815): Hedge Accounting Improvements — accessed 2026-09-25 — https://storage.fasb.org/ASU%202025-09.pdf

## Questions this article answers

**Q: What is hedge accounting?**

Hedge accounting is an optional accounting treatment that aligns the timing of gains and losses on a hedging instrument with the item it hedges, so the income statement shows the offset instead of artificial volatility. Without it, a derivative is marked to market through profit or loss every period while the hedged item often is not recognised yet. To use it, a company must formally designate and document the relationship at inception and show it meets the effectiveness requirements of its standard, IFRS 9 or ASC 815.

**Q: What is the difference between IFRS 9 and ASC 815 hedge accounting?**

Both have the same three hedge types and both require designation and documentation at inception. The main differences: IFRS 9 tests effectiveness on principles (an economic relationship, credit risk not dominating, a hedge ratio that matches risk management) while ASC 815 requires a highly effective relationship, read in practice as 80 to 125 percent offset. IFRS 9 allows rebalancing a hedge ratio without ending the relationship and prohibits voluntary de-designation; US GAAP has no rebalancing concept and lets an entity de-designate at any time. IFRS 9 also applies a basis adjustment for hedged purchases of non-financial items, which US GAAP does not.

**Q: Can you voluntarily de-designate a hedge under IFRS 9?**

No. Under IFRS 9 an entity cannot discontinue a hedging relationship that still meets its risk management objective and the qualifying criteria, after any rebalancing. Hedge accounting stops only when those criteria are no longer met, for example because the risk management objective changed or the hedging instrument expired or was sold. US GAAP is different: ASC 815 lists the entity removing the designation as one of the events that ends hedge accounting.

**Q: What is cost of hedging under IFRS 9?**

Cost of hedging is IFRS 9's treatment for the parts of a hedging instrument left out of the designation: the time value of an option, and optionally the forward element of a forward contract or the foreign currency basis spread. Instead of hitting profit or loss as it moves, the excluded part goes to other comprehensive income and reaches profit or loss either with the hedged transaction or amortised over the hedged period. ASC 815 reaches a similar result through excluded components amortised to earnings, with the unamortised difference held in OCI.