The Effect of Applying Hedge Accounting in Reducing Future Financial Risks in Jordanian Commercial Banks

Haitham I M Almubaideen,Saad A Alsakeni,Abdul Hakim Mustafa Joudeh,Kayed Abd Allah Al-Attar

doi:10.5539/mas.v13n3p140

Abstract

The Effect of Applying Hedge Accounting in Reducing Future Financial Risks in Jordanian Commercial Banks  The study aimed to identify the effect of applying hedge accounting on reducing the future financial risks of the Jordanian commercial banks by using financial ratios to find a practical method of calculating the hedge with its three categories and to address the future financial risks of commercial banks in Jordan.  The researchers used both the descriptive and analytical methods based on the financial statements and reports of the Jordanian commercial banks for the period (2012-2017), in addition of using financial indicators. The study community included the published financial statements of the Jordanian commercial banks before applying hedge accounting and after in accordance with the amendments to IFRS Standard No. 9, as well as the banks listed in the Amman Exchange Market for the period of study. The sample of the study included all Jordanian commercial banks that disclosed the application of hedge accounting in their annual financial statements.  The study concluded that there is a strong correlation between cash flow hedges and reducing the financial risks of Jordanian commercial banks after the application of hedge accounting for the period (2012-2017), and that there is a strong correlation between fair value hedges and reducing the financial risks.  The fair value hedges have an explanatory capacity to reduce the financial risk by 27.4%. This has been derived from the R2 value. There is a weak correlation between the net investments in foreign currencies and the financial risks. The study recommended the importance of maintaining the use of hedge accounting to achieve fairness and honest representation in the final financial statements to the benefit of internal and external users.

Highlights

Hedge accounting is one of the financial instruments used by companies to avoid future financial risks
New types have emerged that have not appeared before. This brought the attention of risks and for the need of developing protection and hedging ways to avoid such different risks, in addition to increasing the information related to the policies of risk management of the companies and the measurement of fair value of the financial instrumentsto make the use of derivatives more transparent (Panaretou.et al 2013, 2)
- Hedge Accounting: it is a method of risk management carried out by using one or more of financial derivatives or other hedge instruments to match the changes in the fair value or cash flow of an asset, financial obligation or any future transaction

Summary

Introduction

Hedge accounting is one of the financial instruments used by companies to avoid future financial risks. New types have emerged that have not appeared before This brought the attention of risks and for the need of developing protection and hedging ways to avoid such different risks, in addition to increasing the information related to the policies of risk management of the companies and the measurement of fair value of the financial instrumentsto make the use of derivatives more transparent (Panaretou.et al 2013, 2). The International Standards Board (IASB) has made several amendments in the use of hedging accounting because of significant difficulties in its application and its defaults to assist the use of hedging accounting in fair value to counter interest rate and future exchange rate risks These amendments seek to provide illustrative guidance for the principles that formed the basis of hedging accounting (IFRS, 2015). Since hedging is the focus of this study, it is essential to identify its concept, its key elements and how it can be used to reduce the risks faced by sectors of a financial nature, the banking sector, as an economic engine that constantly strives to achieve excellence in its business and reach financial stability

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Results