Analysis of hedge accounting in financial institutions. A case study of Kampala city

Abstract

The study analysed the impact of hedge accounting towards credit transactions in financial institutions in Kampala City and identify strategies to improving hedge accounting in credit transactions. Specific objectives were; (i)To assess the application of hedge accounting operates in financial institutions, (ii) To identify measures of improving credit transactions in financial institutions and (iii) To establish principles for the financial reporting of financial assets and financial liabilities in Kampala City. Acase study design was adopted with a sample of 128 Kampala City-based fiancial institutions employees invovling 123 non-management and 5 top management employees. Data was collected by use of questionnaire and interview. Quantitaive and qualitative data was analysed by use of the Statistical Package for Social Sciences (SPSS) and thematic content analysis. It was found cash flow and fair value hedging were in application, credit improvement measure such as continuous hedge instrument and item relationship management, interest rate swap, adherence to forecasted transaction assessment and principles for financial reporting such as accountability, objectivity, quality information and full information disclosure were applied. It was concluded that application of hedge accounting exposes management of these institutions to think of modifications for the standard basis for recognising gains and losses on hedging instruments and the exposure as intended to hedge, management of financial institutions are faced with challenges for credit improvements amidst economic and social issues that affect business and for financial institutions, principle-based approach to financial assets and liabilities can best cause positive outcomes but it requires more effort to manage any risks at hand. The principles of financial reporting are considered to streamline the operations of financial institution that apply hedge accounting. It was recommended that the management of financial institutions in Kampala City should adhere to all the application requirements for hedge accounting, financial institutions should diversify their leverage strategies and introduce robust and tested econometric and financial models to forecast banking sector products’ pricesregulatory authorities-Bank of Uganda and Finance Intellegency authority (FIA) should work together in conjunction with banking sector players to put in place relevant policy, legal and regulatory framework to limit under performances in terms of hedge accounting for some financial institutions and the staff of financial institutions should be trainined with all the principles of financial reporting to have positive outcomes for financial assets and liabilities.