Under deferral hedge accounting, the valuation difference from marking the hedging instrument to fair value is held in net assets as deferred hedge gains or losses, and returned to profit or loss when the gain or loss on the hedged item is recognized. The gain or loss on the hedged item and the gain or loss on the hedging instrument then appear in the same period.
Consider a hypothetical example in which a company holds an interest rate swap that fixes the interest payments on a floating-rate loan, ignoring tax effects. If its fair value at period-end is plus 30 million yen, deferred hedge gains or losses are 30 million yen on the credit side. If it is minus 20 million yen, they are 20 million yen on the debit side. Neither appears in profit or loss for that period, and each returns to profit or loss when the gain or loss on the hedged item is recognized.
It is a different method from the fair value hedging method, which reflects market changes in the hedged item in profit or loss. The practical guidelines as of the 2019 revision read the fair value hedging method as covering only other securities. A treatment that does not mark to fair value, such as the special treatment for interest rate swaps, is not included in deferral hedge accounting.