ACCA Financial Reporting (F7) Practice Exam 2025 – Complete Prep Guide

Hedge accounting primarily aims to align the accounting treatment of the hedging instrument with that of the hedged item, thereby reducing volatility in reported earnings and enhancing the accuracy of financial statements. This alignment is critical because, without hedge accounting, fluctuations in the fair value of the hedging instrument and the hedged item could result in significant swings in profit or loss, making it harder for users of financial statements to assess the underlying performance of the entity.

By applying hedge accounting, any gains or losses on the hedging instrument are recognized in the same period as any gains or losses on the hedged item. This matching reduces the mismatch in income statement recognition, leading to a clearer representation of an entity's financial position and performance.

While the other options mention aspects related to risk and reporting, they do not accurately capture the essence of hedge accounting. It does not eliminate all risks from financial statements, nor does it aim to avoid reporting gains or losses entirely; rather, it focuses on reducing volatility in reported earnings. Finally, simplifying the accounting process is not the primary goal of hedge accounting, which often involves greater complexity to ensure accurate matching of financial outcomes.