MFA $605$ Advanced Accounting Theory

Assignment $2$

Companies are concerned about different operating and financial risks arising from many aspects of their business $($for example, changes in exchange rates, interest rates or commodity prices$).$ Entities implement different risk management strategies to eliminate or reduce their risk exposures. The objective of hedge accounting is to represent, in the financial statements, the effect of risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss $($P&L$)$ or other comprehensive income $($OCI$).$ Thus, hedge accounting is a technique that modifies the normal basis for recognizing gains and losses on associated hedging instruments and hedged items, so that both are recognised in P&L $($or OCI$)$ in the same accounting period. This is a matching concept that eliminates or reduces the volatility in the statement of comprehensive income that otherwise would arise if the hedged item and the hedging instrument were accounted for separately.

Required

a$)$ Using suitable example distinguish between hedge item and hedge instrument

b$)$ Discuss the conditions that must be met before applying hedge accounting

c$)$ Discuss the factor that hinder growth of hedge accounting practices in Kenya