Reference no: EM133058356

Question - Although fair value accounting is becoming more common, especially for financial instruments, there are still some categories of assets and liabilities that are not recognized at fair value on the financial statements. This "mixed measurement model," consisting of both fair values and historical cost, is said to cause the problem of "mismatch," which could result in reported net income volatility exceeding the real volatility experienced by the firm.

Required -

What is meant by the term "natural hedge?"

Why does the practice of reporting some liabilities at historical cost and others at fair value result in excess net income volatility? Your answer should encompass natural hedging and should explain the nature of mismatch, which can generate excess net income volatility.

What is one provision IFRS or U.S. GAAP provides for firms to avoid or reduce the excess net income volatility stemming from mismatch?

What is the effect of excess net income volatility on the likelihood that a firm will violate a debt covenant that sets a maximum limit on the firm's debt-to-equity ratio?