Accounting Mismatch and Mismatched Remeasurement (B4)

10 Key Points on Accounting Mismatch and Mismatched Remeasurement

Accounting Mismatch

Definition: An accounting mismatch occurs when economically related assets and liabilities are treated inconsistently in financial reporting, leading to discrepancies in how their changes in value are recognized.
Example: A common scenario involves investments in debt instruments held under a business model that includes both collecting cash flows and selling the instruments. Changes in the fair value of the asset are recognized in OCI, while a related liability is measured at amortized cost, with no recognition of fair value changes.
Impact: This inconsistency can distort the relevance and comparability of financial statements, as related economic phenomena are not aligned in the reporting framework.
Solution: To address the mismatch, an entity may measure both the asset and liability at fair value through profit or loss (FVTPL), ensuring consistent treatment and improved relevance of the financial statements.
Objective: The aim is to enhance the quality of financial reporting by aligning the measurement and recognition of economically related items, providing a clearer picture of financial performance.

Mismatched Remeasurement

Definition: A mismatched remeasurement arises when an item of income or expense reflects an economic phenomenon incompletely, leading to a loss of relevance in understanding the entity’s performance.
Hedging Example: When a derivative is used in a cash flow hedge for a forecast transaction, changes in the derivative's fair value may occur before the related income or expense from the forecast transaction is recognized.
Treatment: For effective cash flow hedges that qualify for hedge accounting, gains or losses from the derivative’s remeasurement are initially recorded in OCI rather than profit or loss.
Reclassification: These gains or losses are subsequently reclassified into profit or loss when the forecast transaction impacts profit or loss, matching the timing of the hedged item and derivative.
Purpose: This approach ensures that the results of the hedging relationship are presented cohesively, allowing users to better understand the economic effects of the hedge and its contribution to financial performance.

By addressing accounting mismatches and mismatched remeasurement through consistent reporting and proper use of OCI and reclassification, entities can provide more relevant and transparent financial information.