Corporate Risk Management and Hedge Accounting

Abstract

Motivated by the debate about the economic consequences of mandatory adoption of International Financial Reporting Standards (IFRS), this study investigates the effect of hedge accounting under IFRS on corporate risk management. Using a sample of large UK non-financial firms from 2003 to 2008, we show that the implementation of the new standards reduces the level of asymmetric information faced by derivative users. Specifically, for firms that hedge under IFRS we find that analysts' forecast error and dispersion are significantly lower. The paper contributes to prior research on the effects of hedge accounting and on the adoption of IFRS.

Do analysts understand the economic and reporting complexities of derivatives?

“…We contribute by showing that, despite their financial expertise, analysts misjudge the earnings implications of derivatives. We also extend research on derivatives accounting (Melumad et al 1999;Wong 2000;Sapra 2002;Zhang 2009;Panaretou et al 2013) by separating the complexity of derivatives into its economic and reporting components within a dynamic regulatory setting. Our study is the first to differentiate between these two types of complexity.…”

Strategic Entry Decisions, Accounting Signals, and Risk Management

“…Thus more transparent disclosure of derivatives and hedge activities reduces information asymmetry between the firm and equity holders and enhances firm value. In addition, improved information environment facilitates the monitoring of management and indirectly disciplines firms' hedging and production decisions (Melumad et al 1999;Zhang 2009;Ahmed et al 2011;Panaretou et al 2013).…”

Hedge Accounting: An Auditor’s Perspective

“…A radically upgraded hedge accounting framework has been introduced by International Financial Reporting Standard (IFRS hereinafter) 9 (IASB, 2008(IASB, , 2012. The new pronouncements are aimed at rationalizing the accounting and reporting for financial hedges in order to provide an accurate and synchronized portrayal of the risk management strategies of the entity in its reported financials (IFRS Foundation, 2013; Kablan, 2014;McCarroll and Khatri, 2014;Panaretou et. al 2013).…”