Tag Archives: ASC 815

Derivatives and Hedging, ASC 815

Derivatives and Hedging

SFAS 133, June 1988
“Accounting for Derivative Instruments and Hedging Activities”

Derivatives
1. Derivative instruments are recognized in financial statements
2. Derivative instruments are measured at fair value

Characteristics of Derivative Instruments
1. Underlying and notional amounts
2. No initial net investment or smaller than usual initial net investment
3. Require or permit net settlement

SFAS 133 does not apply to the following:
1. Regular way security trades
2. Normal purchases and normal sales
3. Certain insurance contracts
4. Certain financial guarantee contracts
5. Certain contracts not traded on an exchange
6. Derivatives as impediments to sales accounting
–> e.g., guarantee of residual value to avoid sales-type lease
7. Investments in life insurance
8. Certain investments by defined benefit pension plans
9. Loan commitments
10. Registration payment arrangements, FSP EITF 00-19-2

Embedded derivative instruments
–> are separated from the host contract
–> and apply SFAS 133 as a derivative instrument

Measurement of derivatives
–> derivative instruments are measured at fair value

Gains and losses on derivative instruments

1. No hedging designation
–> gains and losses are recognized in earnings

2. Fair value hedge
–> gains and losses are recognized in earnings

3. Cash flow hedge
–> effective portion of the gains and losses are recognized in other comprehensive income
–> ineffective portion of the gains and losses are recognized in earnings

4. Foreign currency hedge
(a) hedge of a foreign currency denominated firm commitment
–> gains and losses are recognized in earnings
(b) hedge of an available-for-sale security
–> gains and losses are recognized in earnings
(c) hedge of a forecasted foreign currency denominated transaction
–> gains and losses are recognized in other comprehensive income
(d) hedge of a net investment in a foreign operation
–> gains and losses are recognized in other comprehensive income

If the hedged item is denominated in foreign currency
–> designate as one of the following:

1. Fair value hedge of
–> an unrecognized firm commitment
–> recognized asset or liability

2. Cash flow hedge of
–> an unrecognized firm commitment
–> a forecasted transaction

3. Hedge of a net investment in a foreign operation

 

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