Derivatives and Hedging, ASC 815

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

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

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

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

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

–> derivative instruments are measured at fair value

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

(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

–> 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