Financial Accounting and Reporting CPA Practice Exam 2025 – Complete Prep Resource

The gains and losses from the ineffective portions of a hedging instrument are reported on the income statement. This reflects the fact that hedge accounting seeks to match the gains and losses on the hedging instrument with the gains and losses on the hedged item to the extent that the hedge is effective. However, any portion of the hedge that is deemed ineffective does not provide the same protective function and therefore must be recognized immediately in profit or loss.

This reporting is consistent with the accounting standards, which require entities to segregate and identify the effective and ineffective portions of a hedge. By reflecting the ineffective portion in the income statement, it preserves the integrity of financial reporting by clearly indicating the actual impact of hedging activities. The timing and manner of this recognition help investors and other users of the financial statements better understand the company's risk management strategies and their corresponding outcomes.