hedging current issues

“IAS 39 allows hedge accounting to be optional. Therefore, even if a company does actually hedge and complies with the current rules they do not need to apply hedge accounting. The rules-based approach to hedge accounting also results in some companies who do hedge not being able to apply hedge accounting because they fall foul of the rules. An example of this is the inability to apply hedge accounting for specific components of non-financial items. For example an airline wishing to protect itself from changes in aircraft fuel prices can in reality do so by entering into forward crude oil contracts. This is because crude oil is a major component of aircraft fuel and the price of aircraft fuel will be closely correlated to crude oil prices. However, this is not considered a valid hedge under IAS 39 as the company can only account for a hedge of either the foreign currency risk, or the entire non-financial item (the purchase price of the aircraft fuel).

Under the new proposals hedging by risk components will be permitted for both financial and non-financial items, if separately identifiable and measurable. In addition, hedging instruments can include non-derivatives and there are significant new disclosure requirements.”

from acca article

1.why is it difficult to quantify hedge effectiveness? as we are using the rule 80-125%?

2. how is it difficult to distinguish between FV hedge and CF hedge? do they have same characteristics?

3. so hedge accounting is not compulsory? because some companies cannot apply for hedge accounting due to the inability to hedge on specific components of non financial items.

4. what are non financial items is it something that does not have a value? can you give examples

5. I don’t understand the example in the article of aircraft. can you explain.