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ANALYSIS OF THE APPLICATION OF HEDGE ACCOUNTING IN THE CROATIAN BANKING SECTOR

Hedge accounting is a special accounting technique that enables the recognition of the effects of business entity’s risk management activities in financial statements in the period when associated risk occurs and affects profit or loss or other comprehensive income. In order to apply hedge accounting, business entity must meet all of the qualifying criteria defined within IFRS 9. Hedge accounting model defined within IFRS 9 is much more flexible regarding the recognition of the effects of entity’s risk management activities in financial statements in comparison to hedge accounting model in ex IAS 39 which was considered as a rule based and which failed to recognize the effects of entity’s risk management activities in financial statements. So, the implementation of hedge accounting model within IFRS 9 had the purpose to enable the wider usage of hedge accounting in financial and, particularly, in nonfinancial sector. For the purpose of applying hedge accounting model defined within IFRS 9, a business entity needs to meet the following qualifying criteria: (a) hedging relationship should consist only of eligible hedging instrument and eligible hedged item ; (b) at the inception of hedging relationship an entity has a formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge and (c) the hedging relationship meets all of the hedge effectiveness requirements. This paper aims to identify the extent to which is hedge accounting applied in banks in Croatian banking sector and to determine the correlation between hedge accounting effects and financial position as well as the correlation between hedge accounting effects and financial performance in those banks in Croatia that apply hedge accounting. Data needed to carry out the survey are gathered from publicly available annual reports of banks in Croatia in the period from 2017 to 2020. The survey is focused on hedge accounting effects recognized in standalone financial statements of banks in Croatia, not in consolidated financial statements. In order to fulfil the aims of the survey, descriptive statistical methods and correlation analysis were applied. Results of the survey have shown that hedge accounting is not widely used in the Croatian banking sector. The results also revealed that there is a strong positive correlation between net gains from hedging and financial position as well as between the fair value of hedging instruments recognized as assets and financial performance while there is a weak positive correlation between hedge accounting effects recognized in profit or loss and financial performance as well as between the fair value of hedging instruments recognized as assets and financial position in those banks in Croatia that apply hedge accounting. Furthermore, results indicated no correlation between the fair value of hedging instruments recognized as liabilities and financial position as well as between the fair value of hedging instruments recognized as liabilities and financial performance in those banks in Croatia that apply hedge accounting

hedge accounting, hedging instrument, hedged item, banks, Croatian banking sector

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