Some financial instruments are valued at amortized cost, while others are valued at fair value, according to International Financial Reporting Standards (IFRS). This so-called "mixed measurement model," which includes both fair value and historical cost, is claimed to generate a "mismatch" problem, which could lead to reported net income volatility exceeding the firm's real volatility.

a. Choose one financial instrument that is recognised at amortised cost and is subject to impairment testing, and another that is recognized at fair value.

b. Sometimes financial derivatives are used as hedging instruments to reduce excess net income volatility. Discuss whether gains and losses in derivative securities are recognized in net income. Discuss in relation to cash flow hedges. Also define what is meant by cash flow hedges.