Hedge accounting changes the timings of recognition of gains and losses. Explain three types of hedge accounting.

There are three types of hedge relationship which are mentioned below: Fair value hedge: A hedge of the exposure to changes in the fair value of a recognised asset or liability, or a firm commitment. Cash flow hedge: A hedge of the exposure to variability in cash flows of a recognised asset or liability, a firm commitment or a highly probable forecast transaction. Net investment hedge: A hedge of the foreign currency risk on a net investment in a foreign operation. For a fair value hedge, the hedged item is adjusted for the gain or loss attributable to the hedged risk. That element is included in the income statement where it will offset the gain or loss on the hedging instrument. For a cash flow hedge, gains and losses on the hedging instrument, to the extent it is an effective hedge, are initially included in equity. They are reclassified to the profit or loss when the hedged item affects the income statement. If the hedged item is the forecast acquisition of a non-financial asset or liability, the entity may choose an accounting policy of adjusting the carrying amount of the non-financial asset and liability for the hedging gain or loss at acquisition.