what is hedge accounting 
hedge accounting is a method of accounting in which entries to adjust the fair value of a security and its opposing hedge are treated as one hedge accounting attempts to reduce the volatility created by the repeated adjustment to a financial instrument s value known as fair value accounting or mark to market this volatility is reduced by combining the instrument and the hedge as one entry which offsets the opposing s movements 1understanding hedge accountinga hedge fund is used to lower the risk of overall losses by assuming an offsetting position in relation to a particular security the purpose of the hedge fund account is not necessarily to generate profit but instead to lessen the impact of associated losses especially those attributed to interest rate exchange rate or commodity risk this helps lower the perceived volatility associated with an investment by compensating for changes that are not purely reflective of an investment s performance the point of hedging a position is to reduce the volatility of the overall portfolio hedge accounting has the same effect except that it is used on financial statements for example when accounting for complex financial instruments adjusting the value of the instrument to fair value creates large swings in profit and loss hedge accounting treats the changes in market value of the reciprocal hedge and the original security as one entry so that large swings are reduced hedge accounting is used in corporate bookkeeping as it relates to derivatives in order to lessen overall risk derivatives are often used to offset the risks associated with a security hedge accounting uses the information from the security and the associated derivative as a single item lessening the appearance of volatility when compared to reporting each individually recording hedge accountinghedge accounting is an alternative to more traditional accounting methods for recording gains and losses when treating the items individually such as a security and its associated hedge fund the gains or losses of each would be displayed individually since the purpose of the hedge fund is to offset the risks associated with the security hedge accounting treats the two line items as one instead of listing one transaction of a gain and one of a loss the two are examined to determine if there was an overall gain or loss between them and just the net amount is recorded this approach can make financial statements simpler as they will have fewer line items but some potential for deception exists since the details are not recorded individually 