A type of hedge that is created for an accounting purpose, rather than for pure risk management purposes. It aims to mitigate the profit/ loss effect associated with financial instruments typically used for hedging such as derivatives. When derivatives are marked-to-market, a balance sheet experiences considerable or substantial fluctuations in the value of its items.

Accounting hedge treats an item and its opposing hedge as one, so that volatility could be reduced or controlled. In other words, it matches the recognition of the derivative gains and losses with those of underlying assets.

Accounting hedge centers on timing and matching, and hence it doesn’t change the economic characteristics of an instrument or transaction.