The hedge accounting mechanism is a recent innovation introduced by SFAS 133. According to this method, transactions designated as hedge should have their results deferred to a future period when the hedged items are recognised. hedge characterisation is a central problem in this subject. Regulatory bodies studied in this work use ad hoc criteria to determine hedge effectiveness. Those criteria are not statistically significant in terms of forecasting the asset's behaviour, a necessary condition for a successful hedge. This sort of hedge characterisation introduces more subjectivity into accounting recognition, allowing for manipulation. This work criticises the option adopted by FASB and other regulatory bodies.
earnings management; hedge effectiveness; correlation; SFAS 133