# ASC 815-25-55: Derivatives and Hedging — Fair Value Hedges — 55 Implementation Guidance and Illustrations Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/815/25/#55-implementation-guidance-and-illustrations) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:08b14f80fa81801c0dbd84de5a681c014703ec5f9cc0ad8c6fc0a87f5ab7e688 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 815-25-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/815/25/#55-implementation-guidance-and-illustrations) SEC content: no ##### [815-25-55-1](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:749555561ad473ecbb3033ce33e8789e6c6a9848e9de5e45f1b8291fa8d9aeda Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2022-01](https://asc.understandingaccounting.org/updates/asu-2022-01/). #### Implementation Guidance ##### [815-25-55-1A](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-1A) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:3063b6bebfc5eecd8d871a5b2ea60a44e57763b9c571d0c82b516b3647662912 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This implementation guidance demonstrates how an entity should apply the following aspects of the portfolio layer method if it elects to designate multiple [hedged layers](https://asc.understandingaccounting.org/glossary/h/#hedged-layer "The hedged item designated in a portfolio layer method hedging relationship, representing a stated amount or stated amounts of a closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments that is not expected to be affected by prepayments, defaults, or other factors affecting the timing and amount of cash flows for the designated hedge period.") of a single closed portfolio: 1. a Performing the similar-asset assessment upon initial designation of a portfolio layer method hedge 2. b Evaluating whether the entity may continue to apply the guidance for a portfolio layer method hedge after initial designation. ##### [815-25-55-1B](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-1B) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:266cea94f9795338ec367cba056ee3a97b686df8b4c76a6058db1598da8d8b64 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For the purposes of illustrating the guidance in paragraph [815-25-55-1A](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-1A), the implementation guidance in paragraphs [815-25-55-1C through 55-1D](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-1C) assumes that Entity A designates multiple hedged layers of a closed portfolio of 5-year and 10-year prepayable loans originated on the hedge inception date. ##### [815-25-55-1C](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-1C) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:58b71e2e3c9cf1d17e2d951adb648e4ca1b7c9114c080183d94279a04ce438d0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A designates hedged layers with assumed maturity dates of three years and seven years, respectively. When applying the similar-asset assessment for a portfolio hedge in accordance with paragraph [815-20-25-12(b)(1)](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-12), Entity A should consider all assets in the closed portfolio for the 3-year hedged layer but consider only the 10-year assets for the 7-year hedged layer. That is, an entity should consider the assets that support the hedged layer. ##### [815-25-55-1D](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-1D) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:6d226ecff60f4592e2382a3873b1d0141631d1223182bda8a6beddb10198f08d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. After initial hedge designation, Entity A should continue to assess whether the individual three-year and seven-year hedged layers meet the requirements in paragraph [815-25-35-7A](https://asc.understandingaccounting.org/asc/815/25/#815-25-35-7A) on the basis of the same assets used to perform the similar-asset assessments in accordance with paragraph [815-25-55-1C](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-1C). For Years 1–3, the entity should consider whether the hedged layers in aggregate are anticipated to be outstanding. #### Illustrations ##### [815-25-55-1E](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-1E) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:f255759f09e8f3160f3bdb3096e84ce006be8ac98918d3120a15e5fcaa4112bf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in Sections 815-20-25, 815-20-35, and 815-25-35 for how an entity may assess hedge effectiveness in a [fair value hedge](https://asc.understandingaccounting.org/glossary/f/#fair-value-hedge "A hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, that are attributable to a particular risk.") of natural gas inventory with futures contracts. Assume that the hedge satisfied all of the criteria for hedge accounting at inception. ##### [815-25-55-2](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:6ef5f5fbc9fd8434843212199108d0587a42315fc64d03a5e9f094875756a739 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A has 20,000 million British thermal units of natural gas stored at its location in West Texas. To hedge the [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") exposure of the natural gas, Entity A sells the equivalent of 20,000 million British thermal units of natural gas futures contracts on a national mercantile exchange. The futures contracts prices are based on delivery of natural gas at the Henry Hub gas collection point in Louisiana. ##### [815-25-55-3](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:8a7bca2266b519036d24f64d4ef08f042c440348ca4eae5b7eb3abd5fcae9220 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The price of Entity A's natural gas inventory in West Texas and the price of the natural gas that is the [underlying](https://asc.understandingaccounting.org/glossary/u/#underlying "A specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable (including the occurrence or nonoccurrence of a specified event such as a scheduled payment under a contract). An underlying may be a price or rate of an asset or liability but is not the asset or liability itself. An underlying is a variable that, along with either a notional amount or a payment provision, determines the settlement of a derivative instrument.") for the futures contracts it sold will differ as a result of regional factors (such as location, pipeline transmission costs, and supply and demand). Entity A therefore may not automatically assume that the hedge will be highly effective at achieving offsetting changes in fair value, and it cannot assess effectiveness by looking solely to the change in the price of natural gas delivered to the Henry Hub. The use of a hedging instrument with a different underlying basis than the item or [transaction](https://asc.understandingaccounting.org/glossary/t/#transaction "An external event involving transfer of something of value (future economic benefit) between two (or more) entities. (See FASB Concepts Statement No. 6, Elements of Financial Statements.)(P) December 16, 2024; (N) December 16, 2025105-10-65-9An external event involving transfer of something of value (future economic benefit) between two (or more) entities.") being hedged is generally referred to as a cross-hedge. The principles for cross-hedges illustrated in this Example also apply to hedges involving other risks. For example, the effectiveness of a hedge of [interest rate risk](https://asc.understandingaccounting.org/glossary/i/#interest-rate-risk "For recognized variable-rate financial instruments and forecasted issuances or purchases of variable-rate financial instruments, interest rate risk is the risk of changes in the hedged item's cash flows attributable to changes in the contractually specified interest rate in the agreement. For recognized fixed-rate financial instruments, interest rate risk is the risk of changes in the hedged item's fair value attributable to changes in the designated benchmark interest rate. For forecasted issuances or purchases of fixed-rate financial instruments, interest rate risk is the risk of changes in the hedged item's cash flows attributable to changes in the designated benchmark interest rate.") in which one interest rate is used as a surrogate for another interest rate would be evaluated in the same way as the natural gas cross-hedge in this Example. ##### [815-25-55-4](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:f4bc132330d03f5d7c4bbcbe951c3c891be6beb84f5ed1a895176b60325d3224 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Both at inception of the hedge and on an ongoing basis, Entity A might assess the hedge's expected effectiveness on a quantitative basis based on the extent of correlation in recent years for periods similar to the spot prices term of the futures contracts between the spot prices of natural gas in West Texas and at the Henry Hub. If those prices have been and are expected to continue to be highly correlated, Entity A might reasonably expect the changes in the fair value of the futures contracts attributable to changes in the spot price of natural gas at the Henry Hub to be highly effective in offsetting the changes in the fair value of its natural gas inventory. In assessing effectiveness during the term of the hedge, Entity A must take into account actual changes in spot prices in West Texas and at the Henry Hub. The period of time over which correlation of prices should be assessed would be based on management's judgment in the particular circumstance. ##### [815-25-55-5](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:a32d5a48bc6c3b6cc9578514d5944ec41971e6003241e4b99f209118a6356fde Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A may not assume that the change in the spot price of natural gas located at Henry Hub, Louisiana, is the same as the change in fair value of its West Texas inventory. The physical hedged item is natural gas in West Texas, not natural gas at the Henry Hub. In identifying the price risk that is being hedged, Entity A also may not assume that its natural gas in West Texas has a Louisiana natural gas component. Use of a price for natural gas located somewhere other than West Texas to assess the effectiveness of a fair value hedge of natural gas in West Texas would be inconsistent with this Subtopic and could result in an assumption that a hedge was highly effective when it was not. If the price of natural gas in West Texas is not readily available, Entity A might use a price for natural gas located elsewhere as a base for estimating the price of natural gas in West Texas. However, that base price must be adjusted to reflect the effects of factors, such as location, transmission costs, and supply and demand, that would cause the price of natural gas in West Texas to differ from the base price. ##### [815-25-55-6](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:5045ecc19fc4098839352d8738392c2fedafb95ecee0869786a387bdea56b05b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Consistent with Entity A's method of assessing whether the hedge is expected to be highly effective, the hedge would not be perfectly effective and there would be a net earnings effect to the extent that the actual change in the fair value of the futures contracts attributable to changes in the spot price of natural gas at the Henry Hub did not offset the actual change in the spot price of natural gas in West Texas per million British thermal units multiplied by 20,000. ##### [815-25-55-7](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:58fc8d7649b242be9863a3195752fd6393eb7e455fa7d25a249cbe645f459e3c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. That method excludes the change in the fair value of the futures contracts attributable to changes in the difference between the spot price and the forward price of natural gas at the Henry Hub in assessing effectiveness. The excluded amount would be recognized in earnings through an amortization approach in accordance with paragraph [815-20-25-83A](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-83A) or a mark-to-market approach in accordance with paragraph [815-20-25-83B](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-83B) and presented in the same income statement line item as the earnings effect of the hedged item in accordance with paragraph [815-20-45-1A](https://asc.understandingaccounting.org/asc/815/20/#815-20-45-1A). ##### [815-25-55-8](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:46edf91f6581e90ced8939d1d32f8f852abc509df5d1f2247e1790be2be62f0a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in Sections 815-20-25, 815-20-35, and 815-25-35 for how an entity may assess hedge effectiveness in a fair value hedge of tire inventory with a forward contract. Assume that the hedge satisfied all of the criteria for hedge accounting at inception. ##### [815-25-55-9](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:2ae192c40ef7fc1c1228757a8965c1ee7431a7d0fd5a3af07f1f711b1fdaf6c4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity B manufactures tires. The production of those tires incorporates a variety of physical components, of which rubber and steel are the most significant, as well as labor and overhead. Entity B hedges its exposure to changes in the fair value of its inventory of 8,000 steel-belted radial tires by entering into a forward contract to sell rubber at a fixed price. ##### [815-25-55-10](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:6b0e5e1b4155103ee8f665644f406abc99a9d08df12d343b423d8b63aef08a1b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity B decides to perform subsequent hedge effectiveness assessments on a quantitative basis and bases its assessment on changes in the fair value of the forward contract attributable to changes in the spot price of rubber. To determine whether the forward contract is expected to be highly effective at offsetting the change in fair value of the tire inventory, Entity B could estimate and compare such changes in the fair value of the forward contract and changes in the fair value of the tires (computed as the market price per tire multiplied by 8,000 tires) for different rubber and tire prices. Entity B also should consider the extent to which past changes in the spot prices of rubber and tires have been correlated. Because tires are a nonfinancial asset and rubber is only an ingredient in manufacturing them, Entity B may not assess hedge effectiveness by looking to the change in the fair value of only the rubber component of the steel-belted radial tires (see paragraph [815-20-25-12(e)](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-12)). Both at inception of the hedge and during its term, Entity B must base its assessment of hedge effectiveness on changes in the market price of steel-belted radial tires and changes in the fair value of the forward contract attributable to changes in the spot price of rubber. ##### [815-25-55-11](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:813e3a373a4ac00c0039725b6099280f736f751986e353bfcff129d1f7db5260 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. It is unlikely that this transaction would be highly effective in achieving offsetting changes in fair value. However, if Entity B concludes that the hedge will be highly effective and the hedge otherwise qualifies for hedge accounting, the hedge would have a net earnings effect to the extent that the actual changes in the following amounts did not offset: 1. a The fair value of the forward contract attributable to the change in the spot price of rubber 2. b The market price of steel-belted radials multiplied by the number of tires in inventory. ##### [815-25-55-12](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:cb5be06ac8f4867618b166a1a0781c1d2f4e833452250411d5e8ca81568f1d88 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because Entity B bases its assessment of effectiveness on changes in spot prices, the change in the fair value of the forward contract attributable to changes in the difference between the spot and forward price of rubber would be excluded from the assessment of effectiveness, recognized in earnings through an amortization approach in accordance with paragraph [815-20-25-83A](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-83A) or a mark-to-market approach in accordance with paragraph [815-20-25-83B](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-83B), and presented in the same income statement line item as the earnings effect of the hedged item in accordance with paragraph [815-20-45-1A](https://asc.understandingaccounting.org/asc/815/20/#815-20-45-1A). ##### [815-25-55-13](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:757303b19545c3b5204e18ba9878006f0b7fe1ed682b6d26c905321a797fbefd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in Sections 815-20-25, 815-20-35, and 815-25-35 for how an entity may assess hedge effectiveness in a fair value hedge of growing wheat with futures contracts. Assume that the hedge satisfied all of the criteria for hedge accounting at inception. ##### [815-25-55-14](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:34d3ad2512e5543592b78b5ccbd3771bfba79cb33dd0bed1d57e8aa544c5f815 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity C has a tract of land on which it is growing wheat. Historically, Entity C has harvested at least 40,000 bushels of wheat from that tract of land. Two months before its expected harvest, Entity C sells 2-month futures contracts for 40,000 bushels of wheat, which it wants to designate as a fair value hedge of its growing wheat, rather than as a [cash flow hedge](https://asc.understandingaccounting.org/glossary/c/#cash-flow-hedge "A hedge of the exposure to variability in the cash flows of a recognized asset or liability, or of a forecasted transaction, that is attributable to a particular risk.") of the projected sale of the wheat after harvest. ##### [815-25-55-15](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:db3a0552bab259cad086a003eafef12f33c81a47641633ee393744d4112c461e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Even though the futures contracts are for the same type of wheat that Entity C expects to harvest in two months, the futures contracts and hedged wheat have different bases because the futures contracts are based on fully grown, harvested wheat, while the hedged item is unharvested wheat with two months left in its growing cycle. Entity C therefore may not automatically assume that the hedge will be highly effective in achieving offsetting changes in fair value. ##### [815-25-55-16](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:47fdc318f286af94b9bb0751dcd33e45017409626bf03df1fb860281dbe98174 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. To determine whether the futures contracts are expected to be highly effective in providing offsetting changes in fair value for the growing wheat, Entity C would need to estimate and compare the fair value of its growing wheat and of the futures contracts for different levels of wheat prices. Entity C may not base its estimate of the value of its growing wheat solely on the current price of wheat because that price is for grown, harvested wheat. Entity C might, however, use the current price of harvested wheat together with other relevant factors, such as additional production and harvesting costs and the physical condition of the growing wheat, to estimate the current fair value of its growing wheat crop. ##### [815-25-55-17](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:3c6ec664ccd20ecf3955bdc167e6bb0c1849bfdbbc1dd2ce72c5232d0a137a26 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. It is unlikely that wheat futures contracts would be highly effective in offsetting the changes in value of growing wheat. ##### [815-25-55-18](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:f68c81faac7f64a6aac923fd17eff486a8fdfa29defdc2accb8f551374eee142 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2016-01](https://asc.understandingaccounting.org/updates/asu-2016-01/). ##### [815-25-55-19](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:f408bb26474f518a4b61034f8aca1cfdf5856ec8e0b9039d4dd012bff207d80c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2016-01](https://asc.understandingaccounting.org/updates/asu-2016-01/). ##### [815-25-55-20](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:38119aaf845e4bc5f97086e4bff722decf7d909db3c86e80a7aa7608943e7f2b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2016-01](https://asc.understandingaccounting.org/updates/asu-2016-01/). ##### [815-25-55-21](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-21) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:c4abf782784ec4374d70c339a4677c18fd8a2de19e6196877655b974554b469d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2016-01](https://asc.understandingaccounting.org/updates/asu-2016-01/). ##### [815-25-55-22](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-22) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:285fd32ed69e0b00529a94c89d7efacfb7ac110e088de1ffa3d2da317ccc127b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2016-01](https://asc.understandingaccounting.org/updates/asu-2016-01/). ##### [815-25-55-23](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-23) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:307adda3f2cd9cf575aca8c4763d9345e082c0c51b27942d4e72cbcebc6da32e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in Sections 815-20-25,815-20-35, and 815-25-35 for how an entity may assess hedge effectiveness in a fair value hedge of a U.S. Treasury bond with put options. Assume that the hedge satisfied all of the criteria for hedge accounting at inception. ##### [815-25-55-24](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-24) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:9d911412f5bdc8dd37381287c1e0c0797f2c1f2da596515efb4498d494672257 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity E owns a U.S. Treasury bond and wants to protect itself against the fair value exposure to declines in the price of the bond. Entity E purchases an at-the-money put option on a U.S. Treasury security with the same terms (remaining maturity, [notional amount](https://asc.understandingaccounting.org/glossary/n/#notional-amount "A number of currency units, shares, bushels, pounds, or other units specified in a derivative instrument. Sometimes other names are used. For example, the notional amount is called a face amount in some contracts."), and interest rate) as the U.S. Treasury bond held and designates the option as a hedge of the fair value exposure of the U.S. Treasury bond. Entity E plans to hold the put option until it expires. ##### [815-25-55-25](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-25) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:e4ee04951a738116b5b4e7f5d2023074f9675aa42873bd5edeef525198462646 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because Entity E plans to hold the put option (a static hedge) rather than manage the position with a delta-neutral strategy, it could assess whether it expects the hedge to be highly effective at achieving offsetting changes in fair value by calculating and comparing the changes in the intrinsic value of the option and changes in the price (fair value) of the U.S. Treasury bond for different possible market prices. In assessing the expectation of effectiveness on an ongoing basis, Entity E also must consider the actual changes in the fair value of the U.S. Treasury bond and in the intrinsic value of the option during the hedge period. ##### [815-25-55-26](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-26) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:048569c13a9c8492fed52e61d4b8a82b62cd0231b4a1359dc1cefe52f64db3da Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. However, because the pertinent critical terms of the option and the bond are the same in this Example, Entity E could expect the changes in value of the bond attributable to changes in interest rates and changes in the intrinsic value of the option to offset completely during the period that the option is in the money. That is, the hedging relationship will be perfectly effective because Entity E has chosen to exclude changes in the option's time value from the assessment of hedge effectiveness. Entity E may elect to account for changes in the time value of the option through an amortization approach in accordance with paragraph [815-20-25-83A](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-83A) or through a mark-to-market approach in accordance with paragraph [815-20-25-83B](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-83B). Under either of those approaches, it should present the portion of excluded components recognized in earnings in the same income statement line item as the earnings effect of the hedged item in accordance with paragraph [815-20-45-1A](https://asc.understandingaccounting.org/asc/815/20/#815-20-45-1A). ##### [815-25-55-27](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-27) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:9ba6dc48fa49606ff9c095986b938f5d6749128bb9a31092872dd296a065c11a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in Sections 815-20-25, 815-20-35, and 815-25-35 for how an entity may assess hedge effectiveness in a fair value hedge of an embedded purchased option with a written option. Assume that the hedge satisfied all of the criteria for hedge accounting at inception. ##### [815-25-55-28](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-28) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:5e71125ec772bd2060b3850fe296a5a71f4f6cc261852222e792b407c9e2e811 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity F issues five-year, fixed-rate debt with an embedded (purchased) call option and, with a different counterparty, writes a call option to neutralize the call feature in the debt. The embedded call option and the written call option have the same [effective notional amount](https://asc.understandingaccounting.org/glossary/e/#effective-notional-amount "The effective notional amount is the stated notional amount adjusted for any leverage factor."), underlying fixed interest rate, and strike price. (The strike price of the option in the debt usually is referred to as the call price.) The embedded option also can be exercised at the same times as the written option. Entity F designates the written option as a fair value hedge of the embedded prepayment option component of the fixed-rate debt. ##### [815-25-55-29](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-29) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:11a2ce64efcf664196b2d21c97ba3757047ce0ccdc44a7817a0c116bca074b9b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. To assess whether the hedge is expected to be highly effective in achieving offsetting changes in fair value, Entity F could estimate and compare the changes in fair values of the two options for different market interest rates. Because this Subtopic does not permit [derivative instruments](https://asc.understandingaccounting.org/glossary/d/#derivative-instrument "Paragraphs 815-10-15-83815-10-15-84815-10-15-85815-10-15-86815-10-15-87815-10-15-88815-10-15-89815-10-15-90815-10-15-91815-10-15-92815-10-15-93815-10-15-94815-10-15-95815-10-15-96815-10-15-97815-10-15-98815-10-15-99815-10-15-100815-10-15-101815-10-15-102815-10-15-103815-10-15-104815-10-15-105815-10-15-106815-10-15-107815-10-15-108815-10-15-109815-10-15-110815-10-15-111815-10-15-112815-10-15-113815-10-15-114815-10-15-115815-10-15-116815-10-15-117815-10-15-118815-10-15-119815-10-15-120815-10-15-121815-10-15-122815-10-15-123815-10-15-124815-10-15-125815-10-15-126815-10-15-127815-10-15-128815-10-15-129815-10-15-130815-10-15-131815-10-15-132815-10-15-133815-10-15-134815-10-15-135815-10-15-136815-10-15-137815-10-15-138815-10-15-139 define the term derivative instrument."), including embedded derivatives whether or not they are required to be accounted for separately, to be separated into components, Entity F can only designate a hedge of the entire change in fair value of the embedded purchased call option. The resulting changes in fair value will be included currently in earnings. Changes in the fair value of the written option also will be included currently in earnings and presented in the same income statement line item as the earnings effect of the hedged item. Any mismatch between the changes in fair values of the hedging instrument and the hedged item attributable to the hedged risk, thus, will be automatically reflected in earnings. (The hedge is likely to have some earnings effect because the premium for the written call option is unlikely to be the same as the premium for the embedded purchased call option.) ##### [815-25-55-30](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-30) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:66614b910129a60b07399821c684f538c1bfbc41501de8f83140878250ac1258 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate application of the guidance in Sections 815-20-25, 815-20-35, and 815-25-35 to a fair value hedge of a commodity inventory: 1. a The terms of the hedging derivative have been negotiated such that the hedging relationship is perfectly effective (Case A). 2. b The hedging relationship is not perfectly effective (Case B). ##### [815-25-55-31](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-31) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:9df30480770a6020a244e527fc6fe9e0e571c34c833d515f327fb1f346c3e118 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. To simplify the illustration and focus on basic concepts, the derivative instrument in Cases A and B is assumed to have no time value. In practice, a derivative instrument used for a fair value hedge of a commodity would have a time value that would change over the term of the hedging relationship. The changes in that time value may be accounted for through an amortization approach in accordance with paragraph [815-20-25-83A](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-83A) or a mark-to-market approach in accordance with paragraph [815-20-25-83B](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-83B). Under either of those approaches, the portion of excluded components recognized in earnings should be presented in the same income statement line item as the earnings effect of the hedged item in accordance with paragraph [815-20-45-1A](https://asc.understandingaccounting.org/asc/815/20/#815-20-45-1A). ##### [815-25-55-32](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-32) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:607f3e18ea1193ae9dc46c29ad2d56cf8d7f1c7645deb65b4bcd8ef22eb18582 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Other Examples in this Section illustrate accounting for the time value component of a derivative instrument. ##### [815-25-55-33](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-33) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:c5138f4142043c6f649636f349c840bfdbb27fd6fac35074c203da00d4669272 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For simplicity, commissions and most other transaction costs, initial margin, and income taxes are ignored unless otherwise stated. Assume that there are no changes in creditworthiness that would alter the effectiveness of the hedging relationship. ##### [815-25-55-34](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-34) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:c808bc7c9fed40bdf174a0b5bf51ab5d4546008d2498c0ae9517bb2cab00f255 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cases A and B share all of the following assumptions: 1. a Entity ABC decides to hedge the risk of changes during the period in the overall fair value of its entire inventory of Commodity A by entering into a derivative instrument, Derivative Z. 2. b On the first day of Period 1, Entity ABC enters into Derivative Z and neither receives nor pays a premium (that is, the fair value at inception is zero). 3. c Entity ABC designates the derivative instrument as a hedge of the changes in fair value of the inventory due to changes in the price of Commodity A during Period 1. 4. d The hedging relationship qualifies for fair value hedge accounting. Entity ABC will assess effectiveness on a quantitative basis both initially and subsequently by comparing the entire change in fair value of Derivative Z with the change in the market price of the hedged commodity inventory. ##### [815-25-55-35](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-35) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:c1e450caf46871935e80864817b2aaa2255336f77d09fd9c727db3a667cf3e15 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, Entity ABC expects the hedge to be perfectly effective because both of the following conditions exist: 1. a The notional amount of Derivative Z matches the amount of the hedged inventory (that is, Derivative Z is based on the same number of bushels as the number of bushels of the commodity that Entity ABC designated as hedged). 2. b The underlying of Derivative Z is the price of the same variety and grade of Commodity A as the inventory at the same location. ##### [815-25-55-36](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-36) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:1c16608ee3f1094c6039b5c4767418d31d1fa0f1b55a2f45a78fd2b33e13dc60 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. At inception of the hedge, Derivative Z has a fair value of zero and the hedged inventory has a carrying amount of $1,000,000 and a fair value of $1,100,000. On the last day of Period 1, the fair value of Derivative Z has increased by $25,000, and the fair value of the inventory has decreased by $25,000. The inventory is sold, and Derivative Z is settled on the last day of Period 1. The following table illustrates the accounting for the situation described in this Case. - ![](https://asc.understandingaccounting.org/asc-img/GUID-4A3F35ED-6FE3-4D14-9EA3-A664820AFF30-low.gif) Debit (Credit) Cash Derivative Inventory Earnings (a) Period 1 Recognize change in fair value of derivative " $25,000 " " $(25,000)" Recognize change in fair value of inventory " $(25,000)" " 25,000 " Recognize revenue from sale " $1,075,000 " " (1,075,000)" Recognize cost of sale of inventory " (975,000)" " 975,000 " Recognize settlement of derivative " 25,000 " " (25,000)" Total " $1,100,000 " $- " $(1,000,000)" " $(100,000)" (a) "For presentation purposes, the change in the fair value of the hedging instrument is in the same income statement line item as the hedged item." ##### [815-25-55-37](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-37) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:0e3faefb91604827621eaa547e67a3ce7195e1037024cf91861de839fd8f68b0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If Entity ABC had sold the hedged inventory at the inception of the hedge, its gross profit on that sale would have been $100,000. This Case illustrates that, by hedging the risk of changes in the overall fair value of its inventory, Entity ABC recognized the same gross profit at the end of the hedge period even though the fair value of its inventory decreased by $25,000. ##### [815-25-55-38](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-38) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:41a0a5f01cdac615ea312d35562352fd35fe7df2ff27cd272ef2b55990f9b7f0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The hedge in Case A was perfectly effective because the gain on Derivative Z exactly offsets the loss on the inventory. However, in this Case, assume the terms of Derivative Z do not perfectly match the inventory and its fair value has increased by $22,500 as compared with the decline in fair value of the inventory of $25,000. The mismatch of $2,500 has to be recognized in earnings and presented in the same income statement line item as the earnings effect of the hedged item. The following table illustrates the accounting for the situation described in this Case. - ![](https://asc.understandingaccounting.org/asc-img/GUID-72C0D6E3-F281-416F-873B-29151002EC12-low.gif) Debit (Credit) Cash Derivative Inventory Earnings (a) Period 1 Recognize change in fair value of derivative " $22,500 " " $(22,500)" Recognize change in fair value of inventory " $(25,000)" " 25,000 " Recognize revenue from sale " $1,075,000 " " (1,075,000)" Recognize cost of sale of inventory " (975,000)" " 975,000 " Recognize settlement of derivative " 22,500 " " (22,500)" Total " $1,097,500 " $- " $(1,000,000)" " $(97,500)" (a) "For presentation purposes, the change in the fair value of the hedging instrument is in the same income statement line item as the hedged item." ##### [815-25-55-39](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-39) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:51fd05e919604595f0c8f727a995a0bb98f8a18e0a0ae19bf72e67eb9dc002db Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The difference between the effect on earnings in Case B and the effect on earnings in Case A is $2,500. ##### [815-25-55-40](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-40) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:f49bd9adf446c8d25a1d70c121799aa454a8ea6b6048968053d228cb66993a41 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example demonstrates the guidance in Subtopic 815-20 and this Subtopic as applied to the mechanics of reporting an interest rate swap used as a fair value hedge of an interest-bearing liability. It is not intended to demonstrate how to compute the fair value of an interest rate swap or an interest-bearing liability. This Example has been simplified by assuming that the interest rate applicable to a payment due at any future date is the same as the rate for a payment due at any other date (that is, the yield curve is flat). Although that is an unrealistic assumption, it makes the amounts used easier to understand without detracting from the purpose of the Example. For simplicity, commissions and most other transaction costs, initial margin, and income taxes are ignored unless otherwise stated. Assume that there are no changes in creditworthiness that would alter the effectiveness of the hedging relationship. ##### [815-25-55-41](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-41) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:6045e4a62895d8539405da4e3d6ff08c4140e8ee9c84e679d673f107ce7cedd0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The fair values of the interest rate swap in this Example are determined using the [zero-coupon method](https://asc.understandingaccounting.org/glossary/z/#zero-coupon-method "A swap valuation method that involves computing and summing the present value of each future net settlement that would be required by the contract terms if future spot interest rates match the forward rates implied by the current yield curve. The discount rates used are the spot interest rates implied by the current yield curve for hypothetical zero coupon bonds due on the date of each future net settlement on the swap."). The zero-coupon method is not the only acceptable method. Explanations of other acceptable methods of determining the fair value of an interest rate swap can be obtained from various published sources. Fair values also may be available from dealers in interest rate swaps and other derivative instruments. ##### [815-25-55-42](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-42) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:5db39ad39724bb26b8b95e9e509b56bac7630e8697742fe8477113f9171dfdd3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Example, the term and notional amount of the interest rate swap match the term and principal amount of the interest-bearing liability being hedged. The fixed and variable interest rates used to determine the net settlements on the interest rate swap match the current yield curve, and the sum of the present values of the expected net settlements is zero at inception. Thus, paragraphs [815-20-25-102 through 25-106](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-102) permit the reporting entity to assume perfect effectiveness. Assessment of effectiveness at one of the interest rate swap's repricing dates would confirm the validity of that assumption. ##### [815-25-55-43](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-43) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:45f152cfff74347caa5552784ab13b86d9c0d5b4ee17b3a5709ad149530c8afb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A shortcut method (see paragraphs [815-20-25-102 through 25-106](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-102) ) can be used to produce the same reporting results as the method illustrated in this Example. This shortcut is only appropriate for a fair value hedge of a fixed-rate asset or liability using an interest rate swap and only if the assumption of perfect effectiveness is appropriate. The steps in the shortcut method are as follows: 1. a Determine the difference between the fixed rate to be received on the interest rate swap and the fixed rate to be paid on the bonds. 2. b Combine that difference with the variable rate to be paid on the interest rate swap. 3. c Compute and recognize interest expense using that combined rate and the fixed-rate liability's principal amount. (Amortization of any purchase premium or discount on the liability also must be considered, although that complication is not incorporated in this Example.) 4. d Determine the fair value of the interest rate swap. 5. e Adjust the carrying amount of the interest rate swap to its fair value and adjust the carrying amount of the liability by an offsetting amount. ##### [815-25-55-44](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-44) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:70e0e09842082acf364bac1024dd2847f157bab142b164704ff284a6d4b5e47d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Amounts determined using the shortcut method and the facts in this Example will match the amounts in paragraph [815-25-55-48](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-48) even though the shortcut does not involve explicitly amortizing the hedge accounting adjustments on the debt. That is, the quarterly adjustments of the debt and explicit amortization of previous adjustments will have the same net effect on earnings as the shortcut method. ##### [815-25-55-45](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-45) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:9fb6d69c2f994598f55f6a6969932753cfad288942f016948411fcd9b57e0f44 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A slightly different shortcut method for interest rate swaps used as cash flow hedges is illustrated in Example 6 (see paragraph [815-30-55-24](https://asc.understandingaccounting.org/asc/815/30/#815-30-55-24)). ##### [815-25-55-46](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-46) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:c51c78b19aee55e1b7df1caa4bcaf269858b366ecfa9d5d14d9869348c0db045 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On July 1, 20X1, Entity ABC borrows $1,000,000 to be repaid on June 30, 20X3. On that same date, Entity ABC also enters into a two-year receive-fixed, pay-variable interest rate swap. Entity ABC designates the interest rate swap as a hedge of the changes in the fair value of the fixed-rate debt attributable to changes in the designated [benchmark interest rate](https://asc.understandingaccounting.org/glossary/b/#benchmark-interest-rate "A widely recognized and quoted rate in an active financial market that is broadly indicative of the overall level of interest rates attributable to high-credit-quality obligors in that market. It is a rate that is widely used in a given financial market as an underlying basis for determining the interest rates of individual financial instruments and commonly referenced in interest-rate-related transactions. In theory, the benchmark interest rate should be a risk-free rate (that is, has no risk of default). In some markets, government borrowing rates may serve as a benchmark. In other markets, the benchmark interest rate may be an interbank offered rate."). Entity ABC designates changes in [London Interbank Offered Rate (LIBOR) swap rates](https://asc.understandingaccounting.org/glossary/l/#london-interbank-offered-rate-swap-rate "The fixed rate on a single-currency, constant-notional interest rate swap that has its variable-rate leg referenced to the London Interbank Offered Rate (LIBOR) with no additional spread over LIBOR on that variable-rate leg. That fixed rate is the derived rate that would result in the swap having a zero fair value at inception because the present value of fixed cash flows, based on that rate, equate to the present value of the variable cash flows. (P) December 16, 2018; (N) December 16, 2020815-20-65-4Glossary term superseded by Accounting Standards Update No. 2018-16.") as the benchmark interest rate in hedging interest rate risk. The terms of the interest rate swap and the debt are as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-3B898A46-729D-4707-877C-A30A1EB42010-low.gif) Interest Rate Swap Fixed-Rate Debt Trade date and borrowing date (a) "July 1, 20X1" "July 1, 20X1" Termination date and maturity date "June 30, 20X3" "June 30, 20X3" Notional amount and principal amount "$1,000,000" "$1,000,000" Fixed interest rate (a) 6.41% 6.41% Variable interest rate 3-month USD LIBOR Not applicable "Settlement dates and interest payment dates (a)" End of each calendar quarter End of each calendar quarter Reset dates "End of each calendar quarter through March 31, 20X3" Not applicable (a) These terms need not match for the assumption of perfect effectiveness to be appropriate. (See paragraphs 815-20-25-102 through 25-110.) ##### [815-25-55-47](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-47) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:f147ad87100fa947ae94b819fe9037dfec8b0c7414f4f00a6c400381f3a8f6ee Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The USD LIBOR rates that are in effect at inception of the hedging relationship and at each of the quarterly reset dates are assumed to be as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-491095C3-7DEB-4E73-9DD6-A4D151F986C6-low.gif) Reset Date 3-Month LIBOR Rate 7/1/X1 6.41% 9/30/X1 6.48% 12/31/X1 6.41% 3/31/X2 6.32% 6/30/X2 7.60% 9/30/X2 7.71% 12/31/X2 7.82% 3/31/X3 7.42% ##### [815-25-55-48](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-48) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:f1cb404c100e5e43ed9fa3632263847f1eb944e5a67e5b7ba5d81cd5b8ae65c2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table summarizes the fair values of the debt and the interest rate swap at each quarter end, the details of the changes in the fair values during each quarter (including accrual and payment of interest, the effect of changes in rates, and level-yield amortization of hedge accounting adjustments), the expense for each quarter, and the net cash payments for each quarter. The calculations of fair value of both the debt and the interest rate swap are made using LIBOR. (A discussion of the appropriate discount rate appears in paragraph [815-20-25-111](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-111).) - ![](https://asc.understandingaccounting.org/asc-img/GUID-8C856392-10E6-4938-9111-AFEA02643DF8-low.gif) Fixed-Rate Debt Interest Rate Swap Expense Net Payment "July 1, 20X1" " $(1,000,000)" $- Interest accrued " (16,025)" - " $(16,025)" Payments (receipts) " 16,025 " - " $16,025 " Effect of change in rates " 1,149 " " (1,149)" - "September 30, 20X1" " (998,851)" " (1,149)" " $(16,025)" " $16,025 " Interest accrued " (16,025)" (19) " $(16,044)" Payments (receipts) " 16,025 " 175 " $16,200 " Amortization of basis adjustments (156) - (156) Effect of change in rates (993) 993 - "December 31, 20X1" " (1,000,000)" - " $(16,200)" " $16,200 " Interest accrued " (16,025)" - " $(16,025)" Payments (receipts) " 16,025 " - " $16,025 " Amortization of basis adjustments - - - Effect of change in rates " (1,074)" " 1,074 " - "March 31, 20X2" " (1,001,074)" " 1,074 " " $(16,025)" " $16,025 " Interest accrued " (16,025)" 17 " $(16,008)" Payments (receipts) " 16,025 " (225) " $15,800 " Amortization of basis adjustments 208 - 208 Effect of change in rates " 12,221 " " (12,221)" - "June 30, 20X2" " (988,645)" " (11,355)" " $(15,800)" " $15,800 " Interest accrued " (16,025)" (216) " $(16,241)" Payments (receipts) " 16,025 " " 2,975 " " $19,000 " Amortization of basis adjustments " (2,759)" - " (2,759)" Effect of change in rates 789 (789) - "September 30, 20X2" " (990,615)" " (9,385)" " $(19,000)" " $19,000 " Interest accrued " (16,025)" (181) " $(16,206)" Payments (receipts) " 16,025 " " 3,250 " " $19,275 " Amortization of basis adjustments " (3,069)" - " (3,069)" Effect of change in rates 532 (532) - "December 31, 20X2" " (993,152)" " (6,848)" " $(19,275)" " $19,275 " Interest accrued " (16,025)" (134) " $(16,159)" Payments (receipts) " 16,025 " " 3,525 " " $19,550 " Amortization of basis adjustments " (3,391)" - " (3,391)" Effect of change in rates (978) 978 - "March 31, 20X3" " (997,521)" " (2,479)" " $(19,550)" " $19,550 " Interest accrued " (16,025)" (46) " $(16,071)" Payments (receipts) " 1,016,025 " " 2,525 " " $1,018,550 " Amortization of basis adjustments " (2,479)" - " (2,479)" "June 30, 20X3" $- $- " $(18,550)" " $1,018,550 " ##### [815-25-55-49](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-49) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:6f3e59a405cce35a1cac635dabee263b1e4cd394b85cb8bbdd1eed7cf1a1cb81 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The preceding table demonstrates two important points that explain why the shortcut method described in paragraphs [815-25-55-43 through 55-45](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-43) produces the same results as the computation in the preceding table if the hedging relationship is perfectly effective: 1. a In every quarter, the effect of changes in rates on the interest rate swap completely offsets the effect of changes in rates on the debt. That is as expected because the hedge is perfectly effective. 2. b In every quarter except the last when the principal is repaid, the expense equals the cash payment. ##### [815-25-55-50](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-50) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:e14e1fec07c4842cfb8f4a46685d1a81989d7681537d0a0533bb90c1e27c638c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table illustrates the computation of interest expense using the shortcut method described in paragraphs [815-25-55-43 through 55-45](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-43) . The results are the same as the results computed in the preceding table. - ![](https://asc.understandingaccounting.org/asc-img/GUID-4922006B-A542-4994-B6D8-73C102721988-low.gif) (a) (b) (c) (d) (e) Quarter Ended Difference between Fixed Rates Variable Rate on Swap "Sum (a) + (b)" Debt's Principal Amount "Interest Expense (\[c\] × \[d\]) ÷ 4" "September 30, 20X1" 0.00% 6.41% 6.41% " $1,000,000 " " $16,025 " "December 31, 20X1" 0.00% 6.48% 6.48% " 1,000,000 " " 16,200 " "March 31, 20X2" 0.00% 6.41% 6.41% " 1,000,000 " " 16,025 " "June 30, 20X2" 0.00% 6.32% 6.32% " 1,000,000 " " 15,800 " "September 30, 20X2" 0.00% 7.60% 7.60% " 1,000,000 " " 19,000 " "December 31, 20X2" 0.00% 7.71% 7.71% " 1,000,000 " " 19,275 " "March 31, 20X3" 0.00% 7.82% 7.82% " 1,000,000 " " 19,550 " "June 30, 20X3" 0.00% 7.42% 7.42% " 1,000,000 " " 18,550 " ##### [815-25-55-51](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-51) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:6187e5ba2c9e88294af57db75f4d34852935f9577a02445c28a3771c9ff8aafc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As stated in the introduction to this Example, a flat yield curve is assumed for simplicity. An upward-sloping yield curve would have made the computations more complex. Paragraph [815-25-55-47](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-47) would have shown different interest rates for each quarterly repricing date, and the present value of each future payment would have been computed using a different rate (as described in paragraph [815-25-55-41](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-41)). However, the basic principles are the same. As long as the hedging relationship meets the criteria for the shortcut method, perfect effectiveness can be assumed. ##### [815-25-55-52](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-52) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:56496b4b500824013d4fcb9513e66fddb5c36e94a57fa577bab5bcee3a00d043 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Example of a fair value hedge of fixed-rate interest-bearing debt, it is assumed that Entity ABC elects to immediately begin amortizing the adjustments of the carrying amount of the fixed-rate debt while the hedge is still in place. Because the change in fair value of the interest rate swap attributable to the passage of time is recognized as interest expense by Entity ABC, the amounts recorded as expenses in the table in paragraph [815-25-55-48](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-48) would be eligible for capitalization under Subtopic 835-20. ##### [815-25-55-53](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-53) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:bf89d243c0e7e76a4b75ae69c51c8b6946e536fdad0d6dfe788159124e8251f1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates one method that could be used pursuant to paragraph [815-20-25-12(f)(2)](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-12) in determining the hedged item's change in fair value attributable to changes in the benchmark interest rate. Other methods could be used in determining the hedged item's change in fair value attributable to changes in the benchmark interest rate as long as those methods meet the criteria in that paragraph. For simplicity, commissions and most other transaction costs, initial margin, and income taxes are ignored unless otherwise stated. Assume that there are no changes in creditworthiness that would alter the effectiveness of the hedging relationship. ##### [815-25-55-54](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-54) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:e34feceac3cffa7a8254a0653ac01b986089d84d0110654ccc6a2a4a53f84ae1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On January 1, 20X0, Entity GHI issues at par a $100,000 BBB-quality 5-year fixed-rate noncallable debt instrument with an annual 10 percent interest coupon. On that date, Entity GHI enters into a 5-year interest rate swap based on the LIBOR swap rate and designates it as the hedging instrument in a fair value hedge of the $100,000 liability. Under the terms of the interest rate swap, Entity GHI will receive fixed interest at 7 percent and pay variable interest at LIBOR. The variable leg of the interest rate swap resets each year on December 31 for the payments due the following year. This Example has been simplified by assuming that the interest rate applicable to a payment due at any future date is the same as the rate for a payment at any other date (that is, the yield curve is flat). During the hedge period, the gain or loss on the interest rate swap will be recorded in earnings. The Example assumes that immediately before the interest rate on the variable leg resets on December 31, 20X0, the LIBOR swap rate increased by 50 basis points to 7.50 percent, and the change in fair value of the interest rate swap for the period from January 1 to December 31, 20X0, is a loss in value of $1,675. ##### [815-25-55-55](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-55) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:fd9c9010b4d3db16fc65f8578a529971e43d1cf2989d3f3539ff5e6fef191d85 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Under this method, the change in a hedged item's fair value attributable to changes in the benchmark interest rate for a specific period is determined as the difference between two present value calculations that use the remaining cash flows as of the end of the period and reflect in the discount rate the effect of the changes in the benchmark interest rate during the period. 1. a [Subparagraph superseded by Accounting Standards Update No. 2017-12](https://asc.understandingaccounting.org/updates/asu-2017-12/). 2. b [Subparagraph superseded by Accounting Standards Update No. 2017-12](https://asc.understandingaccounting.org/updates/asu-2017-12/). ##### [815-25-55-56](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-56) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:3a26a834b7d2c5db7e02220843a1be455b0f780be73eae09abebc9a0d21e9f98 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Both present value calculations are computed using the estimated future cash flows for the hedged item, which would be either its remaining contractual coupon cash flows or the LIBOR benchmark rate component of the remaining contractual coupon cash flows determined at hedge inception as illustrated by the following Cases: 1. a Using the full contractual coupon cash flows (Case A) 2. b Using the LIBOR benchmark rate component of the contractual coupon cash flows (Case B). ##### [815-25-55-56A](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-56A) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:c5d00624c19dc28eb10b83245b3dd9c9f1a95fe13e335152f3eb3297066fcd04 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates two approaches for computing the change in fair value of the hedged item attributable to changes in the benchmark interest rate. This Subtopic does not specify the discount rate that must be used to calculate the change in fair value of the hedged item. ##### [815-25-55-56B](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-56B) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:b732fcd6723d85e284f946371a9b630a4149d1acdcea82669362515c7489fa59 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In Cases A and B in this Example, Entity GHI presents the total change in the fair value of the hedging instrument (that is, the interest accruals and all other changes in fair value) in the same income statement line item (in this case, interest expense) that is used by Entity GHI to present the earnings effect of the hedged item before applying hedge accounting in accordance with paragraph [815-20-45-1A](https://asc.understandingaccounting.org/asc/815/20/#815-20-45-1A). ##### [815-25-55-57](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-57) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:b65d91d28dc3fa5dfbc4a40d43fcdca2abed07d16b0799ea1631a5b5efc1997d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, assume Entity GHI elected to calculate the change in the fair value of the hedged item attributable to interest rate risk on the basis of the full contractual coupon cash flows of the hedged item. Accordingly, both present value calculations in accordance with paragraph [815-25-55-55](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-55) are computed using the remaining contractual coupon cash flows as of the end of the period and the discount rate that reflects the change in the designated benchmark interest rate during the period. The method chosen by Entity GHI in this Case requires that the discount rate be based on the market interest rate for the hedged item at the inception of the hedging relationship. The discount rates used for those present value calculations would be, respectively: 1. a The discount rate equal to the market interest rate for that hedged item at the inception of the hedge adjusted (up or down) for changes in the benchmark rate (designated as the interest rate risk being hedged) from the inception of the hedge to the beginning date of the period for which the change in fair value is being calculated 2. b The discount rate equal to the market interest rate for that hedged item at the inception of the hedge adjusted (up or down) for changes in the designated benchmark rate from the inception of the hedge to the ending date of the period for which the change in fair value is being calculated. ##### [815-25-55-58](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-58) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:8da97b77f271e44b3eda3d31e308c05f0a8f06f530ae641ed1f6c2f0a7c0103f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity GHI elected to subsequently assess hedge effectiveness on a quantitative basis. In Entity GHI's quarterly assessments of hedge effectiveness for each of the first three quarters of year 20X0 in this Example, there was zero change in the hedged item's fair value attributable to changes in the benchmark interest rate because there was no change in the LIBOR swap rate. However, in the assessment for the fourth quarter 20X0, the discount rate for the beginning of the period is 10 percent (the hedged item's original market interest rate with an adjustment of zero), and the discount rate for the end of the period is 10.50 percent (the hedged item's original market interest rate adjusted for the change during the period in the LIBOR swap rate \[+ 0.50 percent\]). - ![](https://asc.understandingaccounting.org/asc-img/GUID-53F7774C-0023-4C4F-B900-855BC5F4ACF0-low.gif) "December 31, 20X0" Calculate the present value using the beginning-of-period discount rate of 10 percent: "$10,000pmt, 10%i, 4n, PV =" " $31,699 " (interest payments) "$100,000fv, 10%i, 4n, PV =" " $68,301 " (principal payment) Total present value " $100,000 " ##### [815-25-55-59](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-59) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:01f4dfb6feaf06c5be599e257eed7f5da656164238655fb6800260f6a0eb4fd3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Calculate the present value using the end-of-period discount rate of 10.50 percent (that is, the beginning-of-period discount rate adjusted for the change during the period in the LIBOR swap rate of 50 basis points). - ![](https://asc.understandingaccounting.org/asc-img/GUID-8603B2D0-B61F-4AB3-BB02-64A16E542172-low.gif) "$10,000pmt, 10.50%i, 4n, PV =" " $31,359 " (interest payments) "$100,000fv, 10.50%i, 4n, PV =" " $67,073 " (principal payment) Total present value " $98,432 " ##### [815-25-55-60](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-60) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:c5e0a50c450af41b30e4a7ed38275c6e6975566c3812b8e0ac061da831e9a3e0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The change in fair value of the hedged item attributable to the change in the benchmark interest rate is $100,000 - $98,432 = $1,568 (the fair value decrease in the liability is a gain on debt). ##### [815-25-55-61](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-61) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:37c30022d4092c0a926f761a6f1bead883449fc5d5d54fd6356ebf2b2211e652 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. When the change in fair value of the hedged item ($1,568 gain) attributable to the risk being hedged is compared with the change in fair value of the hedging instrument ($1,675 loss), a mismatch of $107 results that will be reported in earnings, because both changes in fair value are recorded in earnings. The change in the fair value of the hedging instrument will be presented in the same income statement line item as the earnings effect of the hedged item in accordance with paragraph [815-20-45-1A](https://asc.understandingaccounting.org/asc/815/20/#815-20-45-1A). ##### [815-25-55-61A](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-61A) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:21c221c12a200a92599cfd03817330fbc096b8d790eeeedb5dba800244f9c248 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, assume Entity GHI elected to calculate the change in the fair value of the hedged item attributable to interest rate risk on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception. Accordingly, both present value calculations in accordance with paragraph [815-25-55-55](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-55) are computed using the remaining benchmark rate component of contractual coupon cash flows as of the end period and the discount rate that reflects the change in the designated benchmark rate during the period. The discount rates used by Entity GHI in this Case would be, respectively: 1. a The benchmark rate (designated as the interest rate risk being hedged) as of the beginning date of the period for which the change in fair value is being calculated 2. b The designated benchmark rate as of the ending date of the period for which the change in fair value is being calculated. ##### [815-25-55-61B](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-61B) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:7504f52c497922e561a299a159193c76e7fc728e5bc23cf6e083a62f9ae142cf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity GHI elected to subsequently assess hedge effectiveness on a quantitative basis. In Entity GHI's quarterly assessments of hedge effectiveness for each of the first three quarters of year 20X0, there was no change in the hedged item's fair value attributable to changes in the benchmark interest rate because there was no change in the LIBOR swap rate. However, in the assessment for the fourth quarter 20X0, the discount rate for the beginning of the period is 7 percent, and the discount rate for the end of the period is 7.50 percent reflecting the change during the period in the LIBOR swap rate. The change in fair value of the hedged item attributable to the change in the benchmark interest risk for the period January 1, 20X0, to December 31, 20X0, is a gain of $1,675, calculated as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-779DE608-F20D-410E-95BC-8E56E1DE6462-low.gif) Inputs Inception End of Y1 "December 31, 20X0" Principal " $100,000 " Calculate the present value using the beginning-of-period benchmark interest rate: Interest payment " $10,000 " "$7,000pmt, 7%i, 4n, PV =" " $23,710 " (benchmark component of coupon payments) Benchmark portion " $7,000 " "$100,000fv, 7%i, 4n, PV =" " 76,290 " (principal payment) LIBOR 7.00% 7.50% Total present value " 100,000 " Fixed Coupon 10.00% Fixed swap rate 7.00% Calculate the present value using the end-of-period benchmark interest rate: Remaining term 5 4 "$7,000pmt, 7.50%i, 4n, PV =" " 23,445 " (benchmark component of coupon payments) "$100,000fv, 7.50%i, 4n, PV =" " 74,880 " (principal payment) Swap Valuation Total present value " 98,325 " Swap receives fixed " $7,000 " " $7,000 " Change in value " $1,675 " Swap net CF #REF! #REF! Swap FV - #REF! ##### [815-25-55-61C](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-61C) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:2827663dd9a251587b01518ca1cdc2ec4205fc43158be32fe92df9b97a0516b4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because the change in fair value of the hedged item ($1,675 gain) attributable to the risk being hedged is the same as the change in fair value of the hedging instrument ($1,675 loss), there is perfect offset and, therefore, a zero net earnings effect. ##### [815-25-55-62](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-62) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:880a0860bd9bc1db22efea696bed7d4d0b8e9284a8f329d1f64a02b650bc65f3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates application of the guidance in Sections 815-20-25, 815-20-35, and 815-25-35 to a fair value hedge of a [firm commitment](https://asc.understandingaccounting.org/glossary/f/#firm-commitment "An agreement with an unrelated party, binding on both parties and usually legally enforceable, with the following characteristics:The agreement specifies all significant terms, including the quantity to be exchanged, the fixed price, and the timing of the transaction. The fixed price may be expressed as a specified amount of an entity's functional currency or of a foreign currency. It may also be expressed as a specified interest rate or specified effective yield. The binding provisions of an agreement are regarded to include those legal rights and obligations codified in the laws to which such an agreement is subject. A price that varies with the market price of the item that is the subject of the firm commitment cannot qualify as a fixed price. For example, a price that is specified in terms of ounces of gold would not be a fixed price if the market price of the item to be purchased or sold under the firm commitment varied with the price of gold. The agreement includes a disincentive for nonperformance that is sufficiently large to make performance probable. In the legal jurisdiction that governs the agreement, the existence of statutory rights to pursue remedies for default equivalent to the damages suffered by the nondefaulting party, in and of itself, represents a sufficiently large disincentive for nonperformance to make performance probable for purposes of applying the definition of a firm commitment.") to purchase an asset for a price denominated in a foreign currency. In this Example, the hedging instrument and the firm commitment are denominated in different foreign currencies. Consequently, although the hedge is highly effective at achieving offsetting changes in fair value, the hedge is not perfectly effective, and there will be an earnings effect. (The entity in the Example could have designed a perfectly effective hedge by using a hedging instrument denominated in the same foreign currency as the firm commitment with terms that match the appropriate terms in the firm commitment.) ##### [815-25-55-63](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-63) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:785d74740e2233da916099595be82c04bd85114070854f7981b196cc852f8338 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity MNO's functional currency is the U.S. dollar (USD). On February 3, 20X7, Entity MNO enters into a firm commitment to purchase a machine for delivery on May 1, 20X7. The price of the machine will be 270,000 Swiss francs (CHF 270,000). Also on February 3, 20X7, Entity MNO enters into a forward contract to purchase 240,000 Euros (EUR 240,000) on May 1, 20X7. Entity MNO will pay USD 0.6125 per EUR 1 (a total of USD 147,000), which is the current forward rate for an exchange on May 1, 20X7. Entity MNO designates the forward contract as a hedge of its risk of changes in the fair value of the firm commitment resulting from changes in the USD-CHF forward exchange rate. ##### [815-25-55-64](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-64) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:5da46837d08f55d6d09faef27d74e7f711edbdf5bdd5c9dcaa18bd7587d3c8de Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity MNO will assess effectiveness by comparing the overall changes in the fair value of the forward contract to the changes in fair value in USD of the firm commitment due to changes in USD-CHF forward exchange rates. Entity MNO expects the forward contract to be highly effective as a hedge because all of the following conditions exist: 1. a EUR 240,000 is approximately equal to CHF 270,000 at the May 1, 20X1, forward exchange rate in effect on February 3, 20X7. 2. b Settlement of the forward contract and the firm commitment will occur on the same date. 3. c In recent years, changes in the value in USD of EUR over three-month periods have been highly correlated with changes in the value in USD of CHF over those same periods. ##### [815-25-55-65](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-65) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:150a15df7ee4ac8cd73383ef6c6b953e4724145ef37bc9ebf10dad8a60bafe04 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Although the hedging relationship has been determined to be highly effective at achieving offsetting changes in fair value, the hedge will not be perfectly effective and the difference between changes in the USD equivalent of EUR 240,000 (the notional amount of the forward contract) and changes in the USD equivalent of CHF 270,000 (the amount to be paid for the machine) will affect earnings. The difference between the [spot rate](https://asc.understandingaccounting.org/glossary/s/#spot-rate "The exchange rate for immediate delivery of currencies exchanged.") and the forward exchange rate is not excluded from the assessment of hedge effectiveness because changes in the fair value of the firm commitment are being measured using forward exchange rates. Therefore, the entire change in the fair value of the hedging instrument will be presented in earnings in the same income statement line item as the earnings effect of the hedged item. If the hedged item were a foreign-currency-denominated available-for-sale debt security instead of a firm commitment, Topic 830 would have required its carrying value to be measured using the spot exchange rate. In that case, the spot-forward difference would have been recognized currently in earnings in the same income statement line item as the earnings effect of the hedged item if it was included in the assessment of effectiveness. The spot-forward difference also may be excluded from the assessment of effectiveness and accounted for through either an amortization approach or a mark-to-market approach in accordance with paragraph [815-20-25-83A](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-83A) or paragraph [815-20-25-83B](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-83B). ##### [815-25-55-66](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-66) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:69686d72e34efc375c013a68a8cdcfda4dfe91d056ebb00f43242d521c02710e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The forward exchange rates in effect on certain key dates are assumed to be as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-6BDD626E-3AAB-4C18-B858-776AC49E9D27-low.gif) Date USD-EUR Forward Exchange Rate for Settlement on 5/1/X7 USD-CHF Forward Exchange Rate for Settlement on 5/1/X7 Inception of the hedge—2/3/X7 USD 0.6125 = EUR 1 USD 0.5454 = CHF 1 Quarter end—3/31/X7 USD 0.5983 = EUR 1 USD 0.5317 = CHF 1 Machine purchase—5/1/X7 USD 0.5777 = EUR 1 USD 0.5137 = CHF 1 ##### [815-25-55-67](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-67) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:12e086cd64da65cb209cc8ec8151945afbb48f34ac4f902e9b6852d3e2d27853 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The USD equivalent and changes in the USD equivalent of the forward contract and the firm commitment, the changes in fair value of the forward contract and the firm commitment, and the earnings effect of the hedge on those same key dates are shown in the following table. A 6 percent discount rate is used in this Example. - ![](https://asc.understandingaccounting.org/asc-img/GUID-244D07EA-235F-4957-B3EA-E98FC398E07B-low.gif) 2/3/X7 3/31/X7 5/1/X7 Forward contract "USD-EUR forward exchange rate for settlement on May 1, 20X7" USD 0.61 USD 0.60 USD 0.58 Units of currency (EUR) " × 240,000 " " × 240,000 " " × 240,000 " "Forward price of EUR 240,000 in USD" " 147,000 " " 143,592 " " 138,648 " Contract price in USD " (147,000)" " (147,000)" " (147,000)" Difference USD - USD " (3,408.00)" USD " (8,352.00)" Fair value (present value of the difference) USD - USD " (3,391.00)" USD " (8,352.00)" Change in fair value during the period USD " (3,391.00)" USD " (4,961.00)" Firm commitment "USD-CHF forward exchange rate for settlement on May 1, 20X7" USD 0.55 USD 0.53 USD 0.51 Units of currency (CHF) "× 270,000" "× 270,000" "× 270,000" "Forward price of CHF 270,000 in USD" " (147,258)" " (143,559)" " (138,699)" Initial forward price in USD " 147,258 " " 147,258 " " 147,258 " Difference USD - USD " 3,699.00 " USD " 8,559.00 " Fair value (present value of the difference) USD - USD " 3,681.00 " USD " 8,559.00 " Change in fair value during the period USD " 3,681.00 " USD " 4,878.00 " Difference between changes in fair values of the forward contract denominated in EUR and the firm commitment denominated in CHF USD 290.00 USD (83.00) ##### [815-25-55-68](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-68) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:90cbdd782c26b4b16b3e7d76f5a1068c4fb54f03a7300849f80aedca2c3ca7a2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic requires that Entity MNO recognize currently in earnings all changes in fair values of the forward contract. Because Entity MNO is hedging the risk of changes in fair value of the firm commitment attributable to changes in the forward exchange rates, this Subtopic also requires recognizing those changes currently in earnings. Section 815-20-45 requires that those changes be presented in earnings in the same income statement line item as the earnings effect of the hedged item. ##### [815-25-55-69](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-69) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:191e1717b491a712aa40e08496ab03ef9bf48e4b239f13b3788d7dcf0376ffb5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On May 1, 20X7, Entity MNO fulfills the firm commitment to purchase the machine and settles the forward contract. The entries illustrating fair value hedge accounting for the hedging relationship and the purchase of the machine are summarized in the following table. - ![](https://asc.understandingaccounting.org/asc-img/GUID-6AD64023-7225-4B59-A84B-CA2DDE11E28D-low.gif) Debit (Credit) Cash Firm Commitment Forward Contract Machine Earnings "March 31, 20X7" Recognize change in fair value of firm commitment USD " 3,681 " USD " (3,681)" Recognize change in fair value of forward contract USD " (3,391)" " 3,391 " (290) "April 30, 20X7" Recognize change in fair value of firm commitment " 4,878 " " (4,878)" Recognize change in fair value of forward contract " (4,961)" " 4,961 " 83 "May 1, 20X7" Recognize settlement of forward contract USD " (8,352)" " 8,352 " Recognize purchase of machine " (138,699)" " (8,559)" USD " 147,258 " Total USD " (147,051)" USD - USD - USD " 147,258 " USD (207) ##### [815-25-55-70](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-70) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:9b3499114e123ff7de11880eb6fab042ddacbbe65cba38b6901c0f1e20806b33 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. To simplify this Example and focus on the effects of the hedging relationship, other amounts that would be involved in the purchase of the machine by Entity MNO (for example, shipping costs and installation costs) have been ignored. ##### [815-25-55-71](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-71) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:f77517bad586bc69619f6180440e769fe652cb402bc9ef9732c27db75f5185a4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The effect of the hedge is to recognize the machine at its price in CHF (CHF 270,000) translated at the forward rate in effect at the inception of the hedge (USD 0.5454 per CHF 1). ##### [815-25-55-72](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-72) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:d884d23c0a967cea08a4bda0c23164ba33062bb2f3d92d1839c30695ed341fc3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates application of the guidance in Sections 815-20-25, 815-20-35, and 815-25-35 to a fair value hedge of the LIBOR swap rate in a $100 million A1-quality 5-year fixed-rate noncallable debt. Assume that an entity elected to calculate the change in the fair value of the hedged item attributable to LIBOR interest rate risk using the full contractual coupon cash flows of the hedged item. ##### [815-25-55-73](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-73) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:49081208aee000f3595f1e47263787ef22e8900cce85cdbb72c7b4b18700afb0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On April 3, 20X0, Global Tech issues at par a $100 million A1-quality 5-year fixed-rate noncallable debt instrument with an annual 8 percent interest coupon payable semiannually. On that date, Global Tech enters into a 5-year interest rate swap based on the LIBOR swap rate and designates it as the hedging instrument in a fair value hedge of the $100 million liability. Under the terms of the interest rate swap, Global Tech will receive a fixed interest rate at 8 percent and pay variable interest at LIBOR plus 78.5 basis points (current LIBOR 6.29 percent) on a notional amount of $101,970,000 (semiannual settlement and interest reset dates). A duration-weighted hedge ratio was used to calculate the notional amount of the interest rate swap necessary to offset the debt's fair value changes attributable to changes in the LIBOR swap rate. ##### [815-25-55-74](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-74) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:5bfb957d15c292607707ca9dcf30dfc6e6878208ce73285ffb9e72cd782669e4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example has the following assumptions: 1. a PV01 debt = 4.14 2. b PV01 interest rate swap = 4.06 3. c Hedge ratio = PV01 debt / PV01 interest rate swap = 4.14/4.06 = 1.0197 4. d Interest rate swap notional = 1.0197 x $100 million = $101,970,000. 5. e For simplicity, commissions and most other transaction costs, initial margin, and income taxes are ignored unless otherwise stated. Assume that there are no changes in creditworthiness that would alter the effectiveness of the hedging relationship. ##### [815-25-55-75](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-75) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:114e965c7271a9ea386159f832d6612ed62adf464ee158a53cf499427e242f47 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The Example assumes that the LIBOR swap rate increased 100 basis points to 7.29 percent on June 30, 20X0. The change in fair value of the interest rate swap for the period from April 3 to June 30, 20X0, is a loss of $4,016,000. The change in fair value of the debt attributable to changes in the benchmark interest rate for the period April 3 to June 30, 20X0, is calculated as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-9292640A-E63E-47F9-BFC7-22CD80C9F438-low.gif) Period Principal Balance Coupon Rate Cash Flow - Interest Cash Flow - Principal Present Value 0.5 " $100,000,000 " 0.08 " 2,000,000 " - " 1,956,464 " 1.5 " $100,000,000 " 0.08 " 4,000,000 " - " 3,744,429 " 2.5 " $100,000,000 " 0.08 " 4,000,000 " - " 3,583,185 " 3.5 " $100,000,000 " 0.08 " 4,000,000 " - " 3,428,885 " 4.5 " $100,000,000 " 0.08 " 4,000,000 " - " 3,281,230 " 5.5 " $100,000,000 " 0.08 " 4,000,000 " - " 3,139,933 " 6.5 " $100,000,000 " 0.08 " 4,000,000 " - " 3,004,721 " 7.5 " $100,000,000 " 0.08 " 4,000,000 " - " 2,875,331 " 8.5 " $100,000,000 " 0.08 " 4,000,000 " - " 2,751,513 " 9.5 " $100,000,000 " 0.08 " 4,000,000 " " 100,000,000 " " 68,458,689 " Present value " 96,224,380 " ##### [815-25-55-76](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-76) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:a3b90a52bcdbd14c4f4c347088a7697caee9ba54c4ac97b729e6d5958b3a1a41 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As of June 30, 20X0, 9.5 periods remain and the cash flows are discounted at 9 percent, determined as the initial 8-percent yield plus a 100 basis point increase attributable to the 100 basis point increase in the LIBOR swap rate. The accrual for the first quarter interest was excluded. The following journal entries illustrate the interest rate swap and debt fair value changes, attributable to changes in the LIBOR swap rate, excluding accruals. - ![](https://asc.understandingaccounting.org/asc-img/GUID-77429AD9-F2F1-4486-8A60-E5AC4F78F4E5-low.gif) Debit Credit Debt " $3,775,620 " Interest expense " $3,775,620 " Interest expense " 4,016,000 " Swap liability " 4,016,000 " ##### [815-25-55-77](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-77) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:a069569261b7203ef05d8da6a46197708b9e667126d7bb5cfdad1559d9649772 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The net earnings effect of the hedging relationship was $240,380 because of the mismatch between the change in the fair value of the hedging instrument and the change in fair value of the hedged item. In accordance with paragraph [815-20-45-1A](https://asc.understandingaccounting.org/asc/815/20/#815-20-45-1A), Global Tech presents the entire change in the fair value of the hedging instrument (including interest accruals and all other changes in fair value) in the same income statement line item (in this case, interest expense) that is used by Global Tech to present the earnings effect of the hedged item before applying hedge accounting. ##### [815-25-55-78](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-78) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:056f6dd693b4a4def634797edb709c7e4feed8b270a9d4902dd36e686704c965 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2017-12](https://asc.understandingaccounting.org/updates/asu-2017-12/). ##### [815-25-55-79](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-79) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:38be57c401a995b184d38cf5bf6c7e3563d95d71bd7ac0385d5b719e6f0f67ee Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2017-12](https://asc.understandingaccounting.org/updates/asu-2017-12/). ##### [815-25-55-80](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-80) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:326893b48148e0b43c6fd3b1cde26781d60c9aa55ee1594e6267e21c90d5b744 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2017-12](https://asc.understandingaccounting.org/updates/asu-2017-12/). ##### [815-25-55-81](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-81) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:8bf3a357150d61381e2289186afe4093c65e258f7fef9b35d18524d3c46f877e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2017-12](https://asc.understandingaccounting.org/updates/asu-2017-12/). ##### [815-25-55-82](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-82) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:925ff3db4751e6d886c9f84b3e97b08ed06d3a8288e7f891122546ca9ab4fa34 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2017-12](https://asc.understandingaccounting.org/updates/asu-2017-12/). ##### [815-25-55-83](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-83) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:47df0e4d912e133e1c745d565594167a44efa634e53a54242cf522b5daec05a5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2017-12](https://asc.understandingaccounting.org/updates/asu-2017-12/). ##### [815-25-55-84](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-84) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:cd0458a5543c031bd6aee0c26e4e0751c2cc49b8fcbd8cb40f281c57d6b8df20 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates a circumstance in which statutory remedies for default constitute a disincentive for nonperformance in applying the definition of a firm commitment. Entity A enters into an agreement to purchase 4,000 barrels of a common solvent from a chemical entity at $200 per barrel on June 1, 2000. The provisions of the agreement do not include a specific disincentive for nonperformance that is sufficiently large to make performance probable. However, the laws of the legal jurisdiction to which the agreement is subject provide a disincentive for nonperformance if Entity A does not take delivery of the barrels pursuant to the agreement. The solvent is not [readily convertible to cash](https://asc.understandingaccounting.org/glossary/r/#readily-convertible-to-cash "Assets that are readily convertible to cash have both of the following: Interchangeable (fungible) units Quoted prices available in an active market that can rapidly absorb the quantity held by the entity without significantly affecting the price. (Based on paragraph 83(a) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises.)(P) December 16, 2024; (N) December 16, 2025105-10-65-9Assets that are readily convertible to cash have both of the following: Interchangeable (fungible) units Quoted prices available in an active market that can rapidly absorb the quantity held by the entity without significantly affecting the price."). Therefore, because the governing legal jurisdiction provides statutory rights to pursue remedies for default equivalent to the damages suffered, the agreement includes a disincentive for nonperformance that is sufficiently large to make performance probable for purposes of applying the definition of a firm commitment. ##### [815-25-55-85](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-85) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:cac004d71955a05f4363ce36bab64cb7420a16461ee8ab7a37a5360214f35959 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the application of paragraph [815-25-35-11](https://asc.understandingaccounting.org/asc/815/25/#815-25-35-11) involving the interaction of hedge accounting and measurement of credit losses in Subtopic 326-20 on financial instruments measured at amortized cost. The following Cases also illustrate the effect of the two approaches to calculate the change in the fair value of the hedged item attributable to interest rate risk discussed in paragraph [815-25-35-13](https://asc.understandingaccounting.org/asc/815/25/#815-25-35-13) on that interaction, as follows: 1. a Using the full contractual coupon cash flows (Case A) 2. b Using the benchmark rate component of the contractual coupon cash flows (Case B). ##### [815-25-55-86](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-86) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:5a2778ecbc5886b7d9f1b9c0e750549a1d1a2c3322096eadf5f76439a501336b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A formally documents a qualifying fair value hedge (for fair value changes attributable to changes in the designated benchmark interest rate) between a fixed-rate loan receivable from Entity B and an interest rate swap. The 5-year, fixed-rate loan to Entity B has a principal amount of $1,000,000 payable at maturity and interest payable annually at a 10 percent rate. For simplicity, commissions and most other transaction costs, initial margin, and income taxes are ignored unless otherwise stated. Assume that there are no changes in creditworthiness that would alter the effectiveness of the hedging relationship. ##### [815-25-55-87](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-87) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:e316f6a3924f8fc4abceaaa2ebd58b9d56662f57a408fa3d45e0bd8ef37c473f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. One year after inception of the hedging relationship, the following conditions exist: 1. a [Subparagraph superseded by Accounting Standards Update No. 2017-12](https://asc.understandingaccounting.org/updates/asu-2017-12/). 2. b There has been an adverse change to Entity B's creditworthiness. 3. c The LIBOR swap rate (the designated benchmark interest rate) has decreased from 6 percent to 5.5 percent. ##### [815-25-55-88](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-88) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:fea7c4a1983e9fda92033571fb73ea6b95610f551192c5e6408e4f397dc63942 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assume that the repayment of the loan is not dependent on the underlying collateral. In applying the requirements of Subtopic 326-20 to the loan, Entity A evaluates the loan for credit losses on an individual basis because it does not have similar risk characteristics with other loans in the portfolio and uses a discounted cash flow approach. Entity A determines that the present value of expected future cash flows discounted at the loan's effective interest rate at inception of the loan is $930,000. (See row C in the table in paragraph [815-25-55-90](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-90), which presents calculations—at the end of the first year of the loan's term—of the net present value of current estimates of expected future cash flows based on the loan's original effective interest rate.) ##### [815-25-55-88A](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-88A) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:a61b0074085c83a497f8eceb7870a608bf984d8561a70659a13139bdd4405d2c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, assume that the entity elected to calculate fair value changes in the hedged item attributable to interest rate risk using the full contractual coupon cash flows of the hedged item. One year after inception of the hedging relationship, the change in the hedged item's fair value attributable to changes in the LIBOR swap rate (the designated benchmark interest rate) is a gain of $16,022. (See row B in the table in paragraph [815-25-55-90](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-90), which presents calculations—at the end of the first year of the loan's term—of the net present value of contractual cash flows based on the loan's original effective interest rate adjusted for a 50 basis point decrease in the LIBOR swap rate.) ##### [815-25-55-89](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-89) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:7ddc9d77a733469d9e083481bfb5cdb10fc43c589bf0310457da2d61b1e499fc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. After adjusting the amortized cost basis of the hedged loan by $16,022 (pursuant to paragraph [815-25-35-1(b)](https://asc.understandingaccounting.org/asc/815/25/#815-25-35-1)) for the increase in the hedged item's fair value attributable to changes in the benchmark interest rate, Entity A should apply the guidance in Subtopic 326-20 by doing both of the following: 1. a Comparing the amortized cost basis of the loan after the effect of the fair value hedge, or $1,016,022, to the $944,901 present value of expected future cash flows discounted using the rate that reflects the rate of return implicit in the loan after adjusting the amortized cost basis of the hedged loan pursuant to paragraph [815-25-35-1(b)](https://asc.understandingaccounting.org/asc/815/25/#815-25-35-1) (that is, 9.5 percent) 2. b Recording an allowance for credit losses (with the offsetting entry charged to expense) for the difference of $71,121 ($1,016,022 - $944,901). ##### [815-25-55-90](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-90) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:7fa1a6791c3b6a4fe5cea932550a89379bc8bf6b463703da5d0c76124d2ecee8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Following are calculations (at the end of the first year of the loan's term) of the net present value of the contractual cash flows and the creditor's best estimate of expected future cash flows based on the loan's original effective interest rate and the new implicit rate. - ![](https://asc.understandingaccounting.org/asc-img/GUID-2DE17250-35E4-40CD-876A-7627C94162F9-low.gif) Net Present Value at End of Year 1 Assumed Cash Flow in Year Rate 2 3 4 5 A. Original cash flows and original effective rate 10.0% " $1,000,000 " " $100,000 " " $100,000 " " $100,000 " " $1,100,000 " B. Original cash flows and new implicit rate 9.5% " $1,016,022 " " $100,000 " " $100,000 " " $100,000 " " $1,100,000 " C. Expected future cash flows and original effective rate 10.0% " $930,000 " " $93,000 " " $93,000 " " $93,000 " " $1,023,000 " D. Expected future cash flows and new implicit rate 9.5% " $944,901 " " $93,000 " " $93,000 " " $93,000 " " $1,023,000 " ##### [815-25-55-91](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-91) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:76760883cac0f7ae0e7ece8395c7b237d14de7434d7b7fe8c77781c8ef9973cf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, assume that Entity A elected to calculate fair value changes in the hedged item attributable to interest rate risk using the benchmark rate component of the contractual coupon cash flows of the hedged item determined at hedge inception. One year after inception of the hedging relationship, the change in the hedged item's fair value attributable to changes in the LIBOR swap rate (the designated benchmark interest rate) is a gain of $17,526, which is calculated as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-312A5354-1176-4230-B7EF-E0E3B33A838C-low.gif) Example 14: Interaction with Loan Impairment using Benchmark Cash Flow Approach INPUTS At inception One year later PRINCIPAL & NOTIONAL " $1,000,000 " MARKET RATE 10% 9.2% LIBOR SWAP RATE 6% 50bp decrease CREDIT SPREAD 4% 30bp decrease At the beginning of the loan's term "$60,000pmt, 6%i, 5n, 1,000,000fv, PV =" " $1,000,000 " At the end of the first year of the loan's term "$60,000pmt, 5.5%i, 4n, 1,000,000fv, PV =" " 1,017,526 " " $100,000,000 " Change in value " $(17,526)" New CV of Loan Remaining cash flows at end of Year 1 2 3 4 5 New EIR at end of Year 1 = 9.454% "($1,017,526)" "$100,000 " "$100,000 " "$100,000 " "$1,100,000 " Net Present Value at End of Year 1 Assumed Cash Flow in Year Rate 2 3 4 5 A. Original cash flows and original effective rate 10.00% "$1,000,000 " "$100,000 " "$100,000 " "$100,000 " "$1,100,000 " B. Original cash flows and new Implicit rate 9.45% "$1,017,526 " "$100,000 " "$100,000 " "$100,000 " "$1,100,000 " C. Expected future cash flows and original effective rate 10.00% "$930,000 " "$93,000 " "$93,000 " "$93,000 " "$1,023,000 " D. Expected future cash flows and new implicit rate 9.45% "$946,299 " "$93,000 " "$93,000 " "$93,000 " "$1,023,000 " Impairment Valuation Allowance "$71,226.80 " ##### [815-25-55-92](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-92) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:f3bb0985c656fd04eeca7ca1c92cd0132f7c989d1797296e1b94f87f26acad83 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. After adjusting the amortized cost basis of the hedged loan by $17,526 (in accordance with paragraph [815-25-35-1(b)](https://asc.understandingaccounting.org/asc/815/25/#815-25-35-1)) for the increase in the hedged item's fair value attributable to changes in the benchmark interest rate, Entity A should apply the guidance in Subtopic 326-20 by doing both of the following: 1. a Comparing the amortized cost basis of the loan after the effect of the fair value hedge, or $1,017,526, to the $946,299 present value of expected future cash flows discounted using the rate that reflects the rate of return implicit in the loan after adjusting the amortized cost basis of the hedged loan in accordance with paragraph [815-25-35-1(b)](https://asc.understandingaccounting.org/asc/815/25/#815-25-35-1) (that is, 9.45 percent that equates the adjusted amortized costs basis of the loan with the present value of the contractual cash flows of the loan) 2. b Recognizing an allowance for credit losses (with the offsetting entry charged to expense) for the difference of $71,227 ($1,017,526 - $946,299). ##### [815-25-55-93](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-93) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:91c01493f44e039787e6a677557fc467a773a43752923c329e300761a15cf4fc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Following are calculations (at the end of the first year of the loan's term) of the net present value of the benchmark rate component of the contractual cash flows and the creditor's best estimate of expected future cash flows based on the loan's original effective interest rate and the new implicit rate. In row B, the net present value at the end of the first year is equal to the net present value of the benchmark rate component of the contractual coupon cash flows discounted at the 5.5 percent benchmark rate. - ![](https://asc.understandingaccounting.org/asc-img/GUID-0F50E800-9AF9-4C27-9BC8-DE99C6D3FB13-low.gif) Example 14: Interaction with Loan Impairment using Benchmark Cash Flow Approach INPUTS One year later PRINCIPAL & NOTIONAL MARKET RATE 9.2% LIBOR SWAP RATE 50bp decrease CREDIT SPREAD 30bp decrease At the beginning of the loan's term "$60,000pmt, 6%i, 5n, 1,000,000fv, PV=" #REF! At the end of the first year of the loan's term "$60,000pmt, 5.5%i, 4n, 1,000,000fv, PV=" "$1,017,526 " " $100,000,000 " Change in value #REF! New CV of Loan Remaining cash flows at end of Year 1 2 3 4 5 New EIR at end of Year 1 = 9.454% "($1,017,526)" "$100,000 " "$100,000 " "$100,000 " "$1,100,000 " Net Present Value at End of Year 1 Assumed Cash Flow in Year Rate 2 3 4 5 A. Original cash flows and original effective rate 10.00% "$1,000,000 " "$100,000 " "$100,000 " "$100,000 " "$1,100,000 " B. Original cash flows and new Implicit rate 9.45% "$1,017,526 " "$100,000 " "$100,000 " "$100,000 " "$1,100,000 " C. Expected future cash flows and original effective rate 10.00% "$930,000 " "$93,000 " "$93,000 " "$93,000 " "$1,023,000 " D. "Expected future cash flows and new implicit rate impairment impairment " 9.45% "$946,299 " "$93,000 " "$93,000 " "$93,000 " "$1,023,000 " Valuation Allowance "$71,226.80 " ##### [815-25-55-94](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-94) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:a02d6877fd8aea34aed8d11423a194cb25ab7d4768ab1b91ec629ddcd97af214 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the application of paragraphs [815-20-25-12(b)(2)(ii)](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-12) and [815-25-35-13B](https://asc.understandingaccounting.org/asc/815/25/#815-25-35-13B) to the designation and measurement of a hedged item as a portion of the term of a financial instrument in a hedge of interest rate risk. Assume that Entity S elected to calculate fair value changes in the hedged item attributable to interest rate risk on the basis of the benchmark rate component of the contractual coupon cash flows of the hedged item determined at hedge inception. ##### [815-25-55-95](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-95) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:ff8672b605cbb730e005499716c28b93b7ef6143f776d759f086638d5bd9f454 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On January 1, 20X1, Entity S issues a noncallable, 5-year, $100 million debt instrument with a 3 percent semiannual interest coupon. On that date, the issuer also enters into a 2-year interest rate swap with a notional amount of $100 million. Entity S designates the swap as a fair value hedge of the fixed-rate debt attributable to interest rate risk for the first two years of its term in accordance with the guidance in paragraph [815-20-25-12(b)(2)(ii)](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-12). The swap pays LIBOR and receives a fixed rate of 2 percent, with semiannual payments. The swap has a fair value of zero at inception. The designated benchmark interest rate is the LIBOR swap rate. For ease of calculation, the yield curve is assumed to be flat at the level of the current benchmark interest rate. For simplicity, commissions and most other transaction costs, initial margin, and income taxes are ignored unless otherwise stated. Assume that there are no changes in creditworthiness that would alter the effectiveness of the hedging relationship. ##### [815-25-55-96](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-96) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:9c61a2047642e31e8e260b425886b44e12c0c59fda621096267eb1833632cd13 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example assumes that the LIBOR swap rate increased by 50 basis points to 2.5 percent on June 30, 20X1. The change in fair value of the interest rate swap for the period January 1, 20X1, to June 30, 20X1, is a loss in value of $731,633. ##### [815-25-55-97](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-97) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:2d5f0f654b372776d64ebdf2d6c97fe90d908d26f18e70afa8e933a7247c8351 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In calculating the change in fair value of the debt attributable to changes in the benchmark interest rate in accordance with paragraph [815-25-35-13B](https://asc.understandingaccounting.org/asc/815/25/#815-25-35-13B), Entity S determines that the assumed term of the hedged item is two years because it is hedging only the cash flows associated with the first two years of its debt issuance. The change in fair value of the debt attributable to changes in the benchmark interest rate for the period January 1, 20X1, to June 30, 20X1, is a gain of $731,633, calculated as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-24697D24-05A9-46B7-98AB-AAD78E7D391B-low.gif) Example 15: Fair Value Hedge of Fixed-Rate Debt using Partial Term & Benchmark Cash Flows Inputs 1/1/20X1 Principal Amount of Bond and Swap Notional " $100,000,000 " Fixed Coupon Rate on Bond 3.00% Fixed Rate on Swap 2.00% LIBOR Rate 2.00% Remaining Payment Periods on Bond 10 Remaining Payment Periods on Swap 4 Change in the Fair Value of the Swap Date Discount Swap Swap Swap Swap Rate Payment (LIBOR) Net Payment FV FV Changes 1/1/20X1 1.00% " 1,000,000 " - 6/30/20X1 Change in Value of 5 Year Bond "January 1, 20X1—beginning balance" "$1,000,000pmt, 1.00%i, 4n, 100,000,000fv, PV =" " $100,000,000 " "June 30, 20X1—ending balance" "$1,000,000pmt, 1.25%i, 3n, 100,000,000fv, PV =" " 99,268,367 " Change in value " $731,633 " ##### [815-25-55-98](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-98) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:e32bd888f583bd37e2c055cce6833867d4b815939bafb2c19e745856578471ae Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As of June 30, 20X1, the change in fair value of the debt attributable to the benchmark interest rate is calculated by discounting the benchmark rate component of the contractual coupon cash flows using the benchmark interest rate at June 30, 20X1 (2.5 percent annual rate and 1.25 percent for each semiannual period). The change in fair value of the debt and the change in fair value of the swap result in perfect offset in current-period earnings. In accordance with paragraph [815-20-45-1A](https://asc.understandingaccounting.org/asc/815/20/#815-20-45-1A), Entity S presents the total change in the fair value of the hedging instrument (that is, the interest accruals and all other changes in fair value) in the same income statement line item (in this case, interest expense) that is used by Entity S to present the earnings effect of the hedged item before applying hedge accounting. ##### [815-25-55-99](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-99) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:eb4b54c45e850bb605d802a31d13f1e78a01d5a9fc46df696d0c5330dbce3b7f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Although this Example illustrates the hedged item as the first two years of interest payments associated with an existing debt instrument, paragraph [815-20-25-12(b)(2)(ii)](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-12) permits one interest payment or any consecutive interest payments associated with an existing debt instrument to be designated as the hedged item. An entity also may have one or more separately designated partial-term hedging relationships outstanding at the same time for the same debt instrument. For example, an entity may have 2 outstanding hedging relationships for consecutive interest cash flows in Years 1 and 2 and consecutive interest cash flows in Years 4 and 5 of the 5-year debt instrument. ##### [815-25-55-100](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-100) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:586ce810c71d1b9f096149eb17ce9cb5091619b63b5f9c7364b3d425ba209cb8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate application of the guidance in Sections 815-20-25, 815-20-35, and 815-25-35 to a fair value hedge of the LIBOR swap rate in a $100 million A1-quality 5-year fixed-rate noncallable debt: 1. a Using the full contractual coupon cash flows (Case A) 2. b Using the benchmark rate component of the contractual coupon cash flows (Case B). ##### [815-25-55-101](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-101) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:e8e5a63df58361b04aa175e618e2441963caa0bef96b56de64d14eab865781a6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On July 2, 20X0, Entity XYZ issues at par a $100 million A1-quality 5-year fixed-rate noncallable debt instrument with an annual 8 percent interest coupon payable semiannually. On that date, Entity XYZ enters into a 5-year interest rate swap based on the LIBOR swap rate and designates it as the hedging instrument in a fair value hedge of interest rate risk of the $100 million liability. Under the terms of the interest rate swap, Entity XYZ will receive a fixed interest rate at 8 percent and pay variable interest at LIBOR plus 200 basis points (current LIBOR 6 percent) on a notional amount of $100 million (semiannual settlement and interest reset dates). For simplicity, commissions and most other transaction costs, initial margin, and income taxes are ignored unless otherwise stated. Assume that there are no changes in creditworthiness that would alter the effectiveness of the hedging relationship. The Example also assumes that the yield curve is flat and that the LIBOR swap rate increased 100 basis points to 7 percent on December 31, 20X0. The change in fair value of the interest rate swap for the period from July 2, 20X0, to December 31, 20X0, is a loss of $3,803,843. ##### [815-25-55-102](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-102) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:9b1182f42278f39191043d966a0fea2f60f6310b5cff0c6e2f7e82e7fbbe1f66 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In both Cases A and B in this Example, Entity XYZ presents the total change in the fair value of the hedging instrument (that is, the interest accruals and all other changes in fair value) in the same income statement line item (in this case, interest expense) that is used by Entity XYZ to present the earnings effect of the hedged item before applying hedge accounting in accordance with paragraph [815-20-45-1A](https://asc.understandingaccounting.org/asc/815/20/#815-20-45-1A). ##### [815-25-55-103](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-103) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:7050adbb4eb0150f440f676b89651020371438e5b511c4557863e6d095d34e60 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, assume that Entity XYZ elected to calculate fair value changes in the hedged item attributable to interest rate risk using the full contractual coupon cash flows of the hedged item. The change in fair value of the debt attributable to changes in the benchmark interest rate for the period July 2, 20X0, to December 31, 20X0, is a gain of $3,634,395, calculated as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-3E314B96-342C-45B9-B46E-9765DBF4C650-low.gif) "July 2, 20X0—beginning balance" Principal " $100,000,000 " "$4,000,000pmt, 4.0%i, 10n, 100,000,000fv, PV =" " $100,000,000 " Interest payment " $8,000,000 " "December 31, 20X0—ending balance" "$4,000,000pmt, 4.5%i, 9n, 100,000,000fv, PV =" " 96,365,605 " Change in value " $3,634,395 " LIBOR 6.00% 7.00% Fixed Coupon 8.00% Fixed swap rate 8.00% Credit Spread 2.00% 2.00% Discount rate 8.00% 9.00% Swap Valuation t = 0 1 Pay Libor +200 " $(4,000,000)" " $(4,500,000)" Receive 8% " 4,000,000 " " 4,000,000 " Net Payment - " (500,000)" FV - " 3,803,843 " Change in FV " 3,803,843 " ##### [815-25-55-104](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-104) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:4737fa3244fb363ae6adcdc26eadd83c093139fabdfeeea097b871ad825ab007 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As of December 31, 20X0, the fair value of the debt attributable to interest rate risk is calculated by discounting the full contractual coupon cash flows at the debt's original market rate with a 100 basis point adjustment related to the increase in the LIBOR swap rate (50 basis point adjustment on a semiannual basis). The following journal entries illustrate the interest rate swap and debt fair value changes attributable to changes in the LIBOR swap rate. - ![](https://asc.understandingaccounting.org/asc-img/GUID-02130099-AB4F-4085-9535-26FBBFC8C6CA-low.gif) Debt " $3,634,395 " Interest expense " $3,634,395 " Interest expense " 3,803,843 " Swap liability " 3,803,843 " ##### [815-25-55-105](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-105) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:d44b21826d26a6cea556b624a4e385ef04d524a8bafaed6c329d1e9dea152927 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The net earnings effect of the hedge is $169,448 due to the mismatch between the changes in fair value of the hedging instrument and the hedged item attributable to the changes in the benchmark interest rate. ##### [815-25-55-106](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-106) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:0562e64fde307d75d3ab88a64c2e454f54d6f85c449a6fd113a25fe647621ab4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, assume that Entity XYZ elected to calculate fair value changes in the hedged item attributable to interest rate risk using the benchmark rate component of the contractual coupon cash flows of the hedged item determined at hedge inception. The change in fair value of the debt attributable to changes in the benchmark interest rate for the period July 2, 20X0, to December 31, 20X0, is a gain of $3,803,843, calculated as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-DF714793-C05B-443B-B924-980DA9FD692D-low.gif) Fair value of the debt - Case B Inputs Principal " $100,000,000 " "July 2, 20X0—beginning balance" Interest payment " $8,000,000 " "$3,000,000pmt, 3.0%i, 10n, 100,000,000fv, PV =" " $100,000,000 " Benchmark portion " $6,000,000 " "December 31, 20X0—ending balance" "$3,000,000pmt, 3.5%i, 9n, 100,000,000fv, PV =" " 96,196,157 " at inception 6 months later LIBOR 6.00% 7.00% Change in value " $3,803,843 " Fixed Coupon 8.00% Fixed swap rate 8.00% Credit Spread? 2.00% Swap Valuation t = 0 1 Pay Libor +200 " $(4,000,000)" " $(4,500,000)" Receive 8% " 4,000,000 " " 4,000,000 " Net Payment - " (500,000)" FV - " 3,803,843 " Change in FV " 3,803,843 " ##### [815-25-55-107](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-107) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:6a54d6dddc45b090bd0db9e5f26ee26050304020ef19ba1e91b4c24c2c61709d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As of December 31, 20X0, the fair value of the debt attributable to interest rate risk is calculated by discounting the benchmark rate component of the contractual coupon cash flows using the benchmark interest rate at December 31, 20X0 (7 percent annual rate; 3.5 percent for each semiannual period). The following journal entries illustrate the interest rate swap and debt fair value changes attributable to changes in the LIBOR swap rate. - ![](https://asc.understandingaccounting.org/asc-img/GUID-77EC4A3E-2337-45FA-B3A6-4A617504FAD2-low.gif) Fair value of the debt Inputs Principal " $100,000,000 " "July 2, 20X0 — beginning balance" " $100,000,000 " Interest payment " $8,000,000 " "December 31, 20X0 — ending balance" Benchmark portion " $6,000,000 " "$3,000,000pmt, 3.5%i, 9n, 100,000,000fv, PV =" " 96,196,157 " at inception 6 months later Change in value " $3,803,843 " LIBOR 6.00% 7.00% Fixed Coupon 8.00% Fixed swap rate 8.00% Credit Spread? 2.00% Debt " $3,803,843 " Interest expense " $3,803,843 " Interest expense " 3,803,843 " Swap Valuation Swap liability " 3,803,843 " t = 0 1 Pay Libor +200 " $(4,000,000)" " $(4,500,000)" Receive 8% " 4,000,000 " " 4,000,000 " Net Payment - " (500,000)" FV - " 3,803,843 " Change in FV " 3,803,843 " ##### [815-25-55-108](https://asc.understandingaccounting.org/asc/815/25/#815-25-55-108) Pending content: no Source downloaded (UTC): 2026-09-10T01:37:27.953Z to 2026-09-10T01:37:27.953Z Record version: sha256:b52f8b0678c13d3239d40ab0de7699572bcf6e3c0c2aefbfd9a7bde850d92eb7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The net earnings effect of the hedge is zero due to the perfect offset in fair value changes between the hedging instrument and the hedged item attributable to the changes in the benchmark interest rate.