Cluster Analysis Approach to Measure Awareness of Hedge Accounting and the Significance of IFRS-9
Managing an entity’s risk management is a challenge for corporates. The objective of hedge accounting is to represent the awareness of hedge accounting. The purpose of the paper is to identify the effectiveness of IFRS 9 to meet the objective of reducing entrepreneurs’ risk management with less complexity. The aim of this review is to highlight the importance of hedge accounting and the significance of IFRS 9 in financial reporting.
A questionnaire based on Likert’s Five-Point scale was applied to analyse the results with 252 completed responses. Descriptive statistics have been used for demographical and physiographical report presentations. For testing the hypotheses, the Chi-Square test, Phi test, Fisher's Exact test, One-Way ANOVA, and K-Means cluster techniques have been applied. It is found that there is a strong relationship between the nature of work and the experience of all the respondents of all three clusters. Also, a significant association between awareness of hedge accounting and perception towards the need to change in IFRS 9 among all three clusters has been empirically verified.
Introduction
An accounting practice known as “hedge accounting” is used to lessen the volatility of financial statements brought on by changes in the fair value of financial instruments used to manage risks. In order to provide a more accurate portrayal of an entity’s financial condition, hedge accounting aims to match changes in the value of the hedging instrument with changes in the value of the hedged item.
Hedge accounting rules of IFRS ensure that earnings and expenses regarding hedging relationships are accounted for simultaneously. It offers a more accurate reflection of the hedging relationship's economic reality. Even if the accounting approach of a hedging relationship does not correspond to the legal form of the relationship, the goal of hedge accounting is to recognize the economic implications of the relationship.
Accounting for hedges is optional. Yet, once an entity uses hedge accounting for a relationship, it is impossible to deliberately stop using it unless the particular hedge’s risk management goal is no longer legitimate or relevant. Protecting profit from unintended volatility in the profit or loss account is the primary operational objective.
Hedge Accounting and IFRS 9
Understanding hedge accounting and IFRS 9 requires specialized expertise in financial engineering. By balancing gains and losses in the value of assets or liabilities with comparable gains and losses in hedging derivatives, hedge accounting enables businesses to manage interest rate, currency, and commodity price risks.
In IFRS 9 Financial Instruments, the International Accounting Standards Board (IASB) replaced the legacy, rule-heavy provisions of IAS 39. IFRS 9 establishes more principles-based guidance for classifying, valuing, and disclosing financial instruments, aligning accounting treatment directly with corporate risk management strategies.
Review of Literature
- Abdullah & Ismail (2017): Surveyed 100 Malaysian investors; found that only 33% understood hedge accounting and its financial statement impact, and only 36% were aware of IFRS 9 modifications.
- Sticca & Nakao (2019): Investigated 379 Brazilian listed firms (2010–2017); demonstrated that high currency risk exposure and options to defer taxes on exchange earnings drove hedge accounting adoption.
- Potin, Bortolon, & Neto (2016): Analyzed the Brazilian market, demonstrating that hedge accounting significantly improved the quality of accounting information and lowered information asymmetry.
- Dinh & Seitz (2020): Investigated European banks (2005–2014); proved that hedge accounting disclosures have greater value relevance to capital markets than "as-if" unhedged metrics.
- Ranasinghe, Sivaramakrishnan, & Yi (2022): Examined SFAS 133/ASC 815, showing that derivative accounting complexity continues to challenge even seasoned financial statement users.
- Bullen & Crocker (2019): Surveyed UK finance professionals; revealed that while 60% were aware of hedge accounting, only 35% had implemented it in their organizations, citing a training gap.
Research Methodology & Hypotheses
Questionnaires were administered to 510 respondents, yielding 252 fully completed, valid responses. Likert’s Five-Point scale was utilized. Descriptive statistics were employed for demographic and physiographical analysis, while One-Way ANOVA, Chi-Square, Fisher’s Exact test, Phi symmetric measures, and K-Means cluster analysis were conducted using SPSS 21.
Formulated Null Hypotheses:
- $H_{01}$: There is no significant association between the nature of working and the experience of all the respondents.
- $H_{02}$: There is no significant association between awareness and hedge accounting, and the perception towards the need to change in IFRS 9 among all the three clusters.
- $H_{03}$: There is no significant association between the nature of working and experience among the respondents of all the three clusters.
Demographic Structure & Testing of $H_{01}$
Out of the 252 respondents, 78.2% (197) were academicians and 21.8% (55) were corporate/accounting professionals. In terms of professional tenure, 76.2% (192) possessed 5–10 years of experience, 16.3% (41) had 10–15 years, and 7.5% (19) possessed 15–20 years.
| Variable Category | Classification | Frequency ($N$) | Percent (%) | Valid Percent (%) | Cumulative % |
|---|---|---|---|---|---|
| Nature of Working | Academicians | 197 | 78.2% | 78.2% | 78.2% |
| Professionals | 55 | 21.8% | 21.8% | 100.0% | |
| Professional Experience | 5–10 Years | 192 | 76.2% | 76.2% | 76.2% |
| 10–15 Years | 41 | 16.3% | 16.3% | 92.5% | |
| 15–20 Years | 19 | 7.5% | 7.5% | 100.0% | |
| Total | Valid Sample | 252 | 100.0% | 100.0% | — |
| Statistical Metric | Value | Degrees of Freedom ($df$) | Asymptotic Significance (2-sided) |
|---|---|---|---|
| Pearson Chi-Square | 69.863 | 2 | .000 |
| Likelihood Ratio | 61.562 | 2 | .000 |
| Linear-by-Linear Association | 48.767 | 1 | .000 |
| Number of Valid Cases | 252 | — | — |
K-Means Cluster Analysis & Final Cluster Centers
Hierarchical cluster analysis using a dendrogram confirmed that the sample cleanly segments into three distinct clusters based on awareness and perceptions of IFRS 9:
Cluster 1: Low Awareness
Characterized by low mean agreement scores (~2.00 to 2.39). Contains the highest relative proportion of corporate professionals (32.3%) who remain skeptical or unexposed to IFRS 9 hedge accounting mechanisms.
Cluster 2: Moderate Awareness
Exhibits moderate agreement scores (~3.28 to 3.59). Comprises mid-career respondents with balanced academic and professional backgrounds seeking clearer standard guidance.
Cluster 3: High Awareness
Displays strong agreement scores (~4.13 to 4.43). Heavily represented by academicians (81.7%) who champion IFRS 9's role in risk mitigation and financial statement transparency.
| Physiographical & Demographical Variables | Final Cluster Centers (Mean Likert Score) | ||
|---|---|---|---|
| Cluster 1 ($N=31$) | Cluster 2 ($N=101$) | Cluster 3 ($N=120$) | |
| Physiographical Survey Questions (1 to 5 Scale) | |||
| The fund seeks to hedge investor’s capital against market volatility by employing alternative investment approaches | 2.06 | 3.51 | 4.42 |
| Hedge accounting assesses the amounts, timing, and uncertainty of future cash flows | 2.23 | 3.28 | 4.13 |
| Do you feel that the companies’ hedging activities are effective in risk management | 2.00 | 3.59 | 4.38 |
| There is a requirement for change in IFRS 9 in regard to hedging accounting | 2.39 | 3.39 | 4.33 |
| New adoption will change the way it accounts for financial assets and financial liabilities under IFRS 9 | 2.29 | 3.49 | 4.43 |
| Demographical Variables (%) | |||
| Experience: 5–10 Years | 77.4% | 75.2% | 76.7% |
| Experience: 10–15 Years | 19.4% | 13.9% | 17.5% |
| Experience: 15–20 Years | 3.2% | 10.9% | 5.8% |
| Nature: Academicians | 67.7% | 77.2% | 81.7% |
| Nature: Professionals | 32.3% | 22.8% | 18.3% |
Testing of Hypotheses $H_{02}$ and $H_{03}$
Due to sparse cell counts in cross-tabulations violating standard asymptotic chi-square assumptions, Fisher’s Exact Test was applied for testing $H_{02}$, and the Phi ($\phi$) Symmetric Test was utilized for testing $H_{03}$.
| Cluster Case | Statistical Metric | Awareness towards Hedge Accounting | Opinion for Significance of IFRS 9 |
|---|---|---|---|
| Cluster 1 ($N=31$) | Chi-Square | 11.677 | 26.677 |
| $df$ | 2 | 3 | |
| Asymp. Sig. | .003 | .000 | |
| Exact Sig. | .003 | .000 | |
| Point Probability | .001 | .000 | |
| Cluster 2 ($N=101$) | Chi-Square | 50.455 | 98.010 |
| $df$ | 2 | 3 | |
| Asymp. Sig. | .000 | .000 | |
| Exact Sig. | .000 | .000 | |
| Point Probability | .000 | .000 | |
| Cluster 3 ($N=120$) | Chi-Square | 19.200 | 69.050 |
| $df$ | 1 | 2 | |
| Asymp. Sig. | .000 | .000 | |
| Exact Sig. | .000 | .000 | |
| Point Probability | .000 | .000 |
| Cluster Segment | Nominal Association Test | Coefficient Value | Approximate Significance ($p$-value) | Valid Cases ($N$) |
|---|---|---|---|---|
| Cluster 1 | Phi ($\phi$) | .620 | .003 | 31 |
| Cramer’s V | .620 | .003 | 31 | |
| Cluster 2 | Phi ($\phi$) | .468 | .000 | 101 |
| Cramer’s V | .468 | .000 | 101 | |
| Cluster 3 | Phi ($\phi$) | .563 | .000 | 120 |
| Cramer’s V | .563 | .000 | 120 |
Conclusion & Strategic Implications
Hedge accounting is a valuable tool for entities exposed to financial market risks, such as fluctuations in interest rates, foreign exchange rates, or commodity prices. By utilizing hedge accounting under IFRS 9 / Ind AS 109, entities can reduce unnecessary financial statement volatility, achieve accurate portrayal of their true financial position, and manage enterprise risks more effectively.
This paper successfully categorized 252 respondents into three distinct clusters: Highly Aware, Moderately Aware, and Unaware. The statistical findings confirm:
- A strong relationship exists between the nature of working (academician vs. professional) and experience ($p = 0.000$);
- A highly significant association exists between hedge accounting awareness and positive opinion towards IFRS 9 across all three clusters ($p < 0.05$);
- The Phi test confirms a robust association between occupation and professional tenure within each cluster ($\phi = 0.468 \text{ to } 0.620$).
To bridge the gap between academic understanding and corporate practice, standard setters and professional bodies like ICAI must prioritize targeted practitioner training workshops, enabling CFOs and Chartered Accountants to fully leverage the flexibility of IFRS 9.
Select References & Bibliography
- Abdullah, Azrul, and Ku Nor Izah Ku Ismail. 2017. “Company-Specific Characteristics and the Choice of Hedge Accounting for Derivatives Reporting: Malaysian Case.” International Journal of Accounting, Auditing and Performance Evaluation 13(3).
- Bernhardt, Thomas, Daniel Erlinger, and Lukas Unterrainer. 2016. “IFRS 9: The New Rules for Hedge Accounting from the Risk Management’s Perspective.” ACRN Oxford Journal of Finance and Risk Perspectives 5(3).
- Bullen, P., and Crocker, R. 2019. “Hedge Accounting Awareness among UK Finance Professionals.” Accounting & Finance Review.
- Dinh, Tami, and Barbara Seitz. 2020. “The Information Content of Hedge Accounting—Evidence from the European Banking Industry.” Journal of International Accounting Research 19(2).
- Potin, Silas Adolfo, Patrícia Maria Bortolon, and Alfredo Sarlo Neto. 2016. “Hedge Accounting in the Brazilian Stock Market: Effects on the Quality of Accounting Information, Disclosure, and Information Asymmetry.” Revista Contabilidade & Finanças 27(71).
- Ranasinghe, Tharindra, Konduru Sivaramakrishnan, and Lin Yi. 2022. “Hedging, Hedge Accounting, and Earnings Predictability.” Review of Accounting Studies 27(1).
- Sticca, Ralph Melles, and Silvio Hiroshi Nakao. 2019. “Hedge Accounting Choice as Exchange Loss Avoidance under Financial Crisis: Evidence from Brazil.” Emerging Markets Review 41.