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Hedging Inflation and Other Risks

Complications loom as standard setters take different approaches.

By John Hintze | Updated on June 01, 2011

Companies use derivatives to hedge inflation and other risks, and they can employ hedge accounting to reduce the volatility those instruments may cause in their financial statements by matching hedging instruments against the items being hedged. However, accounting standard setters’ efforts to facilitate the reporting of financial instruments now appear headed in different directions, potentially creating a new set of complications.

U.S. and global standard setters started a joint project well before the financial crisis to give investors more timely and clearer depictions of companies’ use of instruments such as derivatives, and reduce reporting complexity. The crisis increased pressure on the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to come up with a common reporting model for financial instruments.

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