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

An entity might not use hedge accounting when there is no clear relationship between the hedge and the underlying transaction. Hedge accounting is specifically designed to match the timing of gains and losses on the hedging instrument with the recognized gains and losses on the hedged item, which means there must be a clear and direct connection between them.

If the hedge cannot be linked effectively to the underlying exposure, it becomes difficult to determine the effectiveness of the hedge. Without this effective relationship, the entity cannot meet the qualifying criteria for applying hedge accounting as stipulated in accounting standards such as IFRS 9. This situation could lead to volatility in reported earnings due to mismatches in the timing of recognizing gains and losses.

In contrast, other scenarios mentioned, such as hedging an asset to reduce risk or using a long-term loan as a hedging instrument, do not inherently contradict the use of hedge accounting, provided that other criteria are met. Similarly, while investments held for trading may not typically align with hedge accounting's requirements due to their nature, it does not directly prevent the possibility of hedge accounting being applied in other contexts.