Foreign Exchange Hedging under IFRS 9 : Accounting Recognition and Tax Outcomes in a Multicurrency Setting

This study examines how hedge designation of foreign exchange (FX) swaps under IFRS 9 influences accounting recognition and taxation in a multi-currency setting. Focusing on a conceptual case of a Swedish multinational (“NordicCo”) with different functional (EUR) and tax (SEK) currencies, we compare three scenarios: (i) no hedging, (ii) using an FX swap without hedge accounting, and (iii) using an FX swap designated as a qualifying hedge under IFRS 9. We analyse how each scenario affects the accounting recognition and presentation of foreign-exchange gains and losses in financial statements and how these accounting effects relate to the determination of the realised tax base in a multi-currency context. The research adopts a qualitative design combining a structured literature review and a detailed conceptual case analysis. Our findings highlight two main outcomes. First, FX hedge designation under IFRS 9 affects accounting recognition but does not allow entities to hedge away the realised tax base, because taxable income is determined by statutory translation of realised cash flows rather than by accounting recognition choices. The multicurrency setting examined in this study highlights this structural separation. Second, the distinction between non-designated and hedge-designated swaps primarily impacts earnings volatility during the life of the derivative, even though the cumulative economic outcome of the hedge is ultimately the same for the firm. In the non-designated scenario, all FX fluctuations are recognized in profit or loss immediately, causing high gross earnings volatility. By contrast, an IFRS 9 qualifying hedge defers most unrealized FX gains/losses to Other Comprehensive Income (OCI), resulting in a lower gross magnitude of foreign-exchange effects recognised in profit or loss while the hedge is in place. However, at hedge maturity the final impact on profit or loss converges across all scenarios. These results clarify the trade-offs involved in hedge designation: IFRS 9 hedge accounting reallocates the recognition of foreign-exchange effects in the financial statements in a manner that can reduce reported earnings volatility, but it does not affect the realised taxable outcome when the hedged exposure relates to a balance-sheet item. The study fills a gap in prior research by providing a comparative analysis of hedge designation versus non-designation in a multi-currency setting, with implications for financial reporting stability and the book–tax alignment of foreign exchange gains and losses.