With worldwide corporate integration enabling exponential growth for Indian businesses, exposure to global economic forces is unavoidable. Companies engage in global trade or foreign currency transactions to capitalize on arbitrage. However, this may have long-term consequences for the economic outcomes of corporate transactions. Companies confront various risks, including foreign currency risk, commodity price risk, and interest rate risk, among others.
While risk management measures restrict the impact on cash flows, the profit and loss statement is considered the pulse of financial health. The accounting approach used to relate the risk management plan to the profit and loss statement is known as 'hedge accounting', which is a privileged accounting practice under the accounting standards (Ind AS 109 or IFRS 9). When used effectively, hedge accounting and valuation procedures can smooth the profit and loss statement and maintain cash flow parity.
