3422
Cash Flow Hedges
ASC 815: Derivatives and Hedging
📖 Overview
This standard addresses accounting treatment for derivative instruments and hedging activities. Requires derivatives to be measured at fair value on the balance sheet.
🎯 Scope
This standard applies to the accounting treatment for derivative instruments and hedging activities, including:
- Forwards.
- Futures.
- Options.
- Swaps.
⚙️ Key Principles
1. **Definition of a Derivative**:
- A financial instrument whose value changes in response to an underlying variable.
- Requires no (or small) net initial investment.
- Settled at a future date.
2. **Measurement**:
- All derivatives are measured at Fair Value on the balance sheet.
- Fair value changes are recognized in the income statement (unless qualified and designated for hedge accounting).
3. **Hedge Accounting**:
- Aims to match fair value changes of the derivative with changes of the hedged asset or liability.
- **Types of Hedges**:
- **Fair Value Hedge**: Hedges exposure to changes in fair value of an asset or liability.
- **Cash Flow Hedge**: Hedges exposure to changes in cash flows.
- **Net Investment Hedge**: Hedges currency risk in a foreign investment.
✅ Recognition
A derivative is recognized when the contract is entered into.
Changes in the derivative's fair value are recognized each period.
A derivative is derecognized when the contract expires, is sold, settled, or cancelled.
To apply hedge accounting, the entity must:
- Document the hedging relationship at inception.
- The hedge must be highly effective.
- The hedged forecasted cash flows must be probable.
📏 Measurement
**Initial Measurement:**
- Derivatives are measured at Fair Value.
**Subsequent Measurement:**
- Derivatives are remeasured to Fair Value at each balance sheet date.
**Effectiveness Testing:**
- Hedges must be Highly Effective to qualify for hedge accounting.
- Effectiveness range: 80% to 125%.
**Fair Value Hedge:**
- The carrying amount of the hedged asset or liability is adjusted.
- Fair value changes of both the hedge and hedged item are recognized in the income statement.
**Cash Flow Hedge:**
- The effective portion of the hedge gain or loss is recognized in OCI.
- The ineffective portion is recognized in the income statement.
- Accumulated amounts in OCI are reclassified to the income statement when the forecasted cash flows affect income.
📊 Presentation
**On the Balance Sheet:**
- Derivatives appear as assets or liabilities (current or non-current based on maturity).
**On the Income Statement:**
- Gains and losses on derivatives not designated as hedges.
- Ineffective portion of hedges.
- Reclassification of amounts from OCI.
**On OCI:**
- Effective portion of cash flow hedges.
**Note Disclosures:**
- Risk management objectives and strategies.
- Types of derivatives used.
- Fair value of derivatives.
- Hedge effectiveness.
📝 Disclosure Requirements
Disclosures required:
- Risk management objectives and strategies.
- Types of derivatives used (forwards, options, swaps, etc.).
- Fair value of each derivative type (assets and liabilities).
- For fair value hedges:
- Amount of gain or loss recognized.
- Carrying amount adjustments to hedged assets.
- For cash flow hedges:
- Amount recognized in OCI.
- Amount reclassified to the income statement.
- Periods when cash flows are expected to affect income.
- Any hedge ineffectiveness.
- Any embedded derivatives that were separated.
🔗 Related Standards
ASC 820 (Fair Value Measurement), ASC 830 (Foreign Currency Matters), ASC 815-20 (Cash Flow and Fair Value Hedges)
📁 Related Accounts in the Chart of Accounts
Explore accounts commonly associated with this accounting standard.