ACCA Financial Reporting (F7) Practice Exam 2026 – Complete Prep Guide

Hedge accounting refers to a specialized accounting method that aims to align the recognition of gains and losses on hedging instruments with the transactions they are intended to hedge. This approach is particularly relevant for companies that use derivatives or other hedging instruments to manage financial risks associated with fluctuations in interest rates, foreign exchange rates, or commodity prices.

By applying hedge accounting, a company can avoid the potential mismatches in profit and loss that might occur if the gains or losses on the hedging instruments were recognized in different periods than the gains or losses on the underlying transactions they are hedging. This alignment can provide a more accurate reflection of an entity's financial performance and reduce the volatility in reported earnings that can result from recognizing all gains and losses immediately.

This approach helps to provide users of financial statements with a clearer picture of economic reality, as it ensures that the effects of hedging activities are presented consistently with the items being hedged. This ultimately improves the comparability and usefulness of financial information for stakeholders.

In contrast, the other options do not accurately capture the essence of hedge accounting. Recording unrealized gains exclusively, isolating revenue from expenses, or increasing the volatility of reported earnings do not reflect the fundamental principles or objectives of hedge accounting, which aims precisely to mitigate