One of the pleasures of reading accounting standards is discovering ordinary words which have new meanings. Take the word hedge. Most people think of a row of bushes which one can trim with garden shears. Accountants take a different view and turn hedge into an adjective using ‘ed’ or ‘ing’ stuck on the end.
My favourite has to be the hedged item. FRS 102 tells us:
“A hedged item can be a recognised asset, liability, unrecognised firm commitment, highly probable forecast transaction, net investment in a foreign operation …”
In ordinary English, an item might be a book, a kettle or a pair of shorts and on its own doesn’t have much to do, but look at what heroic amounts of work the hedged item has in commitments, forecasting and travelling in foreign counties. In accounting, the hedge gives the item the capability of being many things at once.
Another word is instrument. An instrument can appear in many guises: musical, surgical or found in an aircraft cockpit. But for accountants, it might be a derivative contract, an interest rate swap or a convertible bond. None of them play a note, fly or intervene in the operating room.
FRS 102 also tells us that,
“An instrument may be a hedging instrument …”
An instrument that makes hedges? No. When the two are associated, the hedging instrument, similar to the item, goes into yet another dimension, but this time with restrictions.
“An instrument may be a hedging instrument provided all of the following conditions are met:
(a) it is a financial instrument measured at fair value through profit or loss;
(b) it is a contract with a party external to the reporting entity (ie external to the group or individual entity that is being reported on); and
(c) it is not a written option, except as described in paragraph 12.17C.”
Who would have thought that accountants could combine gardening and music into such an abstract complicated concept?
Accountants borrow familiar words then redefine them in utmost confidence. Specialist accountants understand them perfectly. The rest of us need to pause and remind ourselves that a hedge may not grow in the garden, an instrument may not involve music and an item may not be an item in the usual sense at all.