However, it leaves open the prospect of having identical balance sheet items carried on different measurement bases. Deferral hedge accounting. Continuation of this US practice further links the hedging instrument and the hedged position. For example, with an enterprise hedging an asset or liability, the gain or loss on the derivative used in hedging is incorporated into the carrying amount for the hedged position. When hedging a firm commitment or a forecasted position, the gain or loss is deferred as a separate liability or asset until culmination of the related transaction.
Difficulties also emerge when considering a risk reduction requirement.
If hedging were limited to the market value of assets and liabilities, hedge gains or losses could be reflected in their carrying value. But a reduction of risk requirement based on market value often conflicts with reduction of risk from a cash flow perspective. A swap used to fix variable rate debt, for example, increases the exposure to loss in market value, yet mitigates risk on a cash flow basis. Unrealized gains and losses as a component of equity. This model provides for a wide range of different hedging strategies, but leaves the power to defer earnings impacts largely with the discretion of management.