ASC 815-30
Cash Flow Hedges
815 Derivatives and Hedging
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ASC 815-30 provides the incremental accounting for cash flow hedges — derivatives designated as hedging the variability in expected future cash flows of a forecasted transaction or of a recognized variable-cash-flow asset/liability. The entire change in fair value of the hedging instrument that is included in the assessment of effectiveness is recorded in other comprehensive income and reclassified into earnings in the same period(s) the hedged forecasted transaction affects earnings, presented in the same income statement line item as the hedged item. The Subtopic also governs excluded components, quantitative effectiveness methods for interest rate hedges, and discontinuation/dedesignation (including immediate reclassification when the forecasted transaction is probable of not occurring).
Key points (7)
- When a hedging relationship is highly effective, the entire change in fair value of the designated hedging instrument that is included in the assessment of effectiveness is recorded in other comprehensive income (815-30-35-3), and is later reclassified to earnings in the same period(s) the hedged forecasted transaction (or the asset acquired/liability incurred) affects earnings, in the same income statement line item as the hedged item (815-30-35-3(b), 35-38, 35-39).
- Components excluded from the assessment of effectiveness (e.g., an option's time value, a forward's spot-forward difference) are recognized in earnings under either the amortization approach (815-20-25-83A) or the mark-to-market approach (815-20-25-83B), presented in the same line item as the hedged item's earnings effect (815-30-35-3(a)).
- Entities that do not report earnings are not permitted to use cash flow hedge accounting (815-30-15-2(a)).
- Three quantitative effectiveness methods are available for interest rate swap cash flow hedges — change-in-variable-cash-flows, hypothetical-derivative, and change-in-fair-value — but the change-in-variable-cash-flows method may not be used if the swap's fair value is not somewhat near zero at inception (815-30-35-10, 35-13, 35-14).
- A loss must be reclassified immediately from AOCI into earnings to the extent continued deferral would result in recognizing a net loss on the combination of the hedging instrument and the hedged transaction (815-30-35-40 through 35-41); recognition of impairment or credit losses on the related asset or liability likewise triggers immediate reclassification of an offsetting net gain (815-30-35-43).
- Hedge accounting is discontinued prospectively if a criterion is no longer met, the derivative expires or is sold/terminated/exercised, or the designation is removed; the existing net gain or loss remains in AOCI and is reclassified as the forecasted transaction affects earnings (815-30-40-1, 40-2).
- If it becomes probable the forecasted transaction will not occur by the end of the originally specified period or within an additional two months (absent rare extenuating circumstances), the AOCI amount is reclassified into earnings immediately and may not later be returned to AOCI (815-30-40-4 through 40-6); disclosures include the estimated net amount expected to be reclassified within the next 12 months (815-30-50-1(c)).
For students. Cash flow hedges are heavily tested because of the OCI-then-reclassify mechanic: the entire effective change in fair value goes to OCI (no separate ineffectiveness recognition after ASU 2017-12) and leaves AOCI only when the hedged transaction hits earnings. The classic trap is the two-month rule — a discontinued hedge keeps its gain or loss in AOCI unless the forecasted transaction becomes probable of not occurring by the original date plus two months, which forces immediate reclassification to earnings.
cash flow hedgeaccumulated other comprehensive incomeforecasted transactionhighly effectiveexcluded componenthypothetical-derivative methoddedesignationreclassification into earnings
Machine-generated study aid for ASC 815-30. Check the source paragraphs below.
815-30-00Status
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815-30-00-1
The following table identifies the changes made to this Subtopic.
815-30-05Overview and Background
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815-30-05-1
This Subtopic provides incremental guidance on accounting for and financial reporting of cash flow hedges established under the criteria in Subtopic815-20such as subsequent measurement and dedesignation of a hedging relationship. Implementation guidance and examples specific to cash flow hedges are included in both Subtopic 815-20 and this Subtopic.
815-30-15Scope and Scope Exceptions
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Overall Guidance
Entities
815-30-15-2
The guidance in this Subtopic does not apply to the following entities:
- aEntities that do not report earnings. Those entities are not permitted to use cash flow hedge accounting because they do not report earnings separately.
815-30-15-3
Consistent with the provisions of Topic 958, this Subtopic does not prescribe how a not-for-profit entity (NFP) should determine the components of an operating measure, if one is presented. For guidance on the application of this Subtopic by not-for-profit health care entities, see Subtopic 954-815.
815-30-25Recognition
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815-30-25-1
See Section 815-20-25 for the criteria under which an entity may designate a derivative instrument as hedging the exposure to variability in expected future cash flows that is attributable to a particular risk.
815-30-35Subsequent Measurement
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815-30-35-1
The guidance in this Section is organized as follows:
- aSubsequent recognition and measurement of gains and losses on hedging instrument
- bReclassifications from accumulated other comprehensive income into earnings
- cHedging relationship's timing that involves uncertainty within a range
- d
Subsequent Recognition and Measurement of Gains and Losses on Hedging Instrument
815-30-35-3
When the relationship between the hedged item and hedging instrument is highly effective at achieving offsetting changes in cash flows attributable to the hedged risk, an entity shall record in other comprehensive income the entire change in the fair value of the designated hedging instrument that is included in the assessment of hedge effectiveness. More specifically, a qualifying cash flow hedge shall be accounted for as follows:
- aAn entity's defined risk management strategy for a particular hedging relationship may exclude a specific component of the gain or loss, or related cash flows, on the hedging derivative from the assessment of hedge effectiveness (as discussed in paragraphs 815-20-25-81 through 25-83B). That excluded component of the gain or loss shall be recognized in earnings either through an amortization approach in accordance with paragraph 815-20-25-83A or through a mark-to-market approach in accordance with paragraph 815-20-25-83B. Under either approach, the amount recognized in earnings for an excluded component shall 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. For example, if the effectiveness of a hedging relationship with an option is assessed based on changes in the option's intrinsic value, the changes in the option's time value would be excluded from the assessment of hedge effectiveness and either may be recognized in earnings through an amortization approach in accordance with paragraph 815-20-25-83A or currently in earnings in accordance with paragraph 815-20-25-83B.
- bAmounts in accumulated other comprehensive income related to the derivative designated as a hedging instrument included in the assessment of hedge effectiveness are reclassified to earnings in the same period or periods during which the hedged forecasted transaction affects earnings in accordance with paragraphs 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. The balance in accumulated other comprehensive income associated with the hedged transaction shall be the cumulative gain or loss on the derivative instrument from inception of the hedge less all of the following:
- 1
- 1aThe derivative instrument's gains or losses previously reclassified from accumulated other comprehensive income into earnings pursuant to paragraphs .
- 1bThe cumulative amount amortized to earnings related to excluded components accounted for through an amortization approach in accordance with paragraph 815-20-25-83A.
- 1cThe cumulative change in fair value of an excluded component for which changes in fair value are recorded currently in earnings in accordance with paragraph 815-20-25-83B.
- 2
If hedge accounting has not been applied to a cash flow hedging relationship in a previous effectiveness assessment period because the entity's retrospective evaluation indicated that the relationship had not been highly effective in achieving offsetting changes in cash flows in that period, the cumulative gain or loss on the derivative referenced in (b) would exclude the gains or losses occurring during that period. That situation may arise if the entity had previously determined, for example, under a regression analysis or other appropriate statistical analysis approach used for prospective assessments of hedge effectiveness, that there was an expectation in which the hedging relationship would be highly effective in future periods. Consequently, the hedging relationship continued even though hedge accounting was not permitted for a specific previous effectiveness assessment period. - c
- dIf a non-option-based contract is the hedging instrument in a cash flow hedge of the variability of the functional-currency-equivalent cash flows for a recognized foreign-currency-denominated asset or liability that is remeasured at spot exchange rates under paragraph 830-20-35-1, an amount that will both offset the related transaction gain or loss arising from that remeasurement and adjust earnings for that period's allocable portion of the initial spot-forward difference associated with the hedging instrument (cost to the purchaser or income to the seller of the hedging instrument) shall be reclassified each period from other comprehensive income to earnings if the assessment of effectiveness is based on total changes in the non-option-based instrument's cash flows.If an option contract is used as the hedging instrument in a cash flow hedge of the variability of the functional-currency-equivalent cash flows for a recognized foreign-currency-denominated asset or liability that is remeasured at spot exchange rates under paragraph 830-20-35-1 to provide only one-sided offset against the hedged foreign exchange risk, an amount shall be reclassified each period to or from other comprehensive income with respect to the changes in the underlying that result in a change in the hedging option's intrinsic value. In addition, if the assessment of effectiveness is based on total changes in the option's cash flows (that is, the assessment will include the hedging instrument's entire change in fair value—its entire gain or loss), an amount that adjusts earnings for the amortization of the cost of the option on a rational basis shall be reclassified each period from other comprehensive income to earnings. This guidance is limited to foreign currency hedging relationships because of their unique attributes and is an exception for foreign currency hedging relationships.
- e
- f
815-30-35-5
If an entity has designated and documented that it will assess effectiveness and measure hedge results of a cash flow hedge of foreign currency risk on an after-tax basis as permitted by paragraph 815-20-25-3(b)(2)(vi), the portion of the gain or loss on the hedging instrument that exceeded the loss or gain on the hedged item shall be included as an offset to the related tax effects in the period in which those tax effects are recognized.
815-30-35-6
Remeasurement of the hedged foreign-currency-denominated assets and liabilities is based on the guidance in Topic 830, which requires remeasurement based on spot exchange rates, regardless of whether a cash flow hedging relationship exists.
815-30-35-7
Examples 1 through 4 (see paragraphs ) illustrate assessing hedge effectiveness. Example 10 (see paragraph 815-30-55-63) illustrates the application of paragraph 815-30-35-3.
815-30-35-8
The remainder of this guidance addresses the following matters:
- aApplication to single cash flow hedge of a forecasted sale or purchase on credit for foreign exchange risk
- bAssessing hedge effectiveness in certain cash flow hedges involving interest rate risk when effectiveness is assessed on a quantitative basis
- cHedging relationship in which hedge effectiveness is based on an option's terminal value.
- dChange in the designated hedged risk.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7The remainder of this guidance addresses the following matters: - aApplication to single cash flow hedge of a forecasted sale or purchase on credit for foreign exchange risk
- bAssessing hedge effectiveness in certain cash flow hedges involving interest rate risk when effectiveness is assessed on a quantitative basis
- cHedging relationship in which hedge effectiveness is based on an option's terminal value
- dChange in the contractually specified interest rate for forecasted interest payments on choose-your-rate debt.
815-30-35-9
For a single cash flow hedge that encompasses the variability of functional-currency-equivalent cash flows attributable to foreign exchange risk related to the settlement of a foreign-currency-denominated receivable or payable resulting from a forecasted sale or purchase on credit, the guidance in paragraph 815-30-35-3 is applied as follows:
- aThe gain or loss on the derivative instrument that is included in the assessment of hedge effectiveness is reported in other comprehensive income during the period before the forecasted purchase or sale.
- bThe functional currency interest rate implicit in the hedging relationship as a result of entering into the forward contract is used to determine the amount of cost or income to be ascribed to each period of the hedging relationship. The cash flow hedging model for recognized foreign-currency-denominated assets and liabilities requires use of the interest method at the inception of the hedging relationship to determine the amount of cost or income to be ascribed to each relevant period of the hedging relationship. However, for simplicity, in hedging relationships in which the hedged item is a short-term non-interest-bearing account receivable or account payable, the amount of cost or income to be ascribed each period can also be determined using a pro rata method based on the number of days or months of the hedging relationship. In addition, in a short-term single cash flow hedging relationship that encompasses the variability of functional-currency-equivalent cash flows attributable to foreign exchange risk related to the settlement of a foreign-currency-denominated receivable or payable resulting from a forecasted sale or purchase on credit, the amount of cost or income to be ascribed each period can also be determined using a pro rata method or a method that uses two foreign currency forward exchange rates. The first foreign currency forward exchange rate would be based on the maturity date of the forecasted purchase or sale transaction. The second foreign currency forward exchange rate would be based on the settlement date of the resulting account receivable or account payable.
- cFor forecasted sales on credit, the amount of cost or income ascribed to each forecasted period is reclassified from other comprehensive income to earnings on the date of the sale. For forecasted purchases on credit, the amount of cost or income ascribed to each forecasted period is reclassified from other comprehensive income to earnings in the same period or periods during which the asset acquired affects earnings. The reclassification from other comprehensive income to earnings of the amount of cost or income ascribed to each forecasted period is based on the guidance in paragraphs .
- dThe income or cost ascribed to each period encompassed within the periods of the recognized foreign-currency-denominated receivable or payable is reclassified from other comprehensive income to earnings at the end of each reporting period.
815-30-35-10
This guidance addresses the following three methods of assessing effectiveness of certain cash flow hedges when hedge effectiveness is assessed on a quantitative basis in accordance with paragraphs 815-20-25-3(b)(2)(iv)(01) and 815-20-35-2 through 35-2F:
- aChange-in-variable-cash-flows method
- bHypothetical-derivative method
- cChange-in-fair-value method.
815-30-35-11
Those three methods relate to assessing the effectiveness of a cash flow hedge that involves any of the following:
- aA receive-variable, pay-fixed interest rate swap designated as a hedge of the variable interest payments on an existing floating-rate liability
- bA receive-fixed, pay-variable interest rate swap designated as a hedge of the variable interest receipts on an existing variable-rate asset
- cCash flow hedges of the variability of future interest payments on interest-bearing assets to be acquired or interest-bearing liabilities to be incurred (such as the rollover of an entity's short-term debt as described in Example 9 [see paragraph 815-30-55-52]).
815-30-35-12
The hedging relationships covered by this guidance encompass either of the following:
- aHedges of interest rate risk (pursuant to paragraph 815-20-25-15(j)(2)) that do not qualify for the shortcut method
- bHedges of the risk of overall changes in the hedged cash flows related to the asset or liability (pursuant to paragraph 815-20-25-15(j)(1)).
815-30-35-13
If, at the inception of the hedge, the fair value of the interest rate swap designated as the hedging instrument is zero or is somewhat near zero, any of the three methods in paragraph 815-30-35-10 may be applied to assess hedge effectiveness.
815-30-35-14
In contrast, if, at the inception of the hedge, the fair value of the interest rate swap is not somewhat near zero, the change-in-variable-cash-flows method shall not be applied to assess hedge effectiveness because that method does not require entities to consider the interest element of the change in fair value of a hedging instrument that incorporates a financing element; instead, either the hypothetical-derivative method or the change-in-fair-value method shall be applied. Those latter two methods require entities to consider the interest element of the change in fair value of a hedging instrument that incorporates a financing element that is not somewhat near zero, such as if the interest rate swap has been structured to be significantly in the money at the inception of the hedging relationship.
815-30-35-15
Under all three methods, an entity shall consider the risk of default by counterparties that are obligors with respect to the hedging instrument (the interest rate swap) or hedged transaction, pursuant to the guidance in paragraphs 815-20-25-122 and 815-20-25-16(a), respectively. An underlying assumption in this guidance is that the likelihood of the obligor not defaulting is assessed as being probable.
815-30-35-15A
When assessing hedge effectiveness using any of the three methods specified in paragraph 815-30-35-10, in addition to the guidance specific to each method, an entity also shall apply the general guidance in paragraph 815-20-25-79 on prospective considerations and retrospective evaluations of hedge effectiveness.
815-30-35-16
An entity shall assess hedge effectiveness under the change-in-variable-cash-flows method by comparing the following items:
- aThe variable leg of the interest rate swap
- bThe hedged variable-rate cash flows on the asset or liability.
815-30-35-17
As noted in paragraph 815-30-35-14, the change-in-variable-cash-flows method shall not be used in certain circumstances.
815-30-35-18
The change-in-variable-cash-flows method is consistent with the cash flow hedge objective of effectively offsetting the changes in the hedged cash flows attributable to the hedged risk. The method is based on the premise that only the floating-rate component of the interest rate swap provides the cash flow hedge, and any change in the interest rate swap's fair value attributable to the fixed-rate leg is not relevant to the variability of the hedged interest payments (receipts) on the floating-rate liability (asset).
815-30-35-19
An entity shall assess hedge effectiveness under this method by comparing the following amounts:
- aThe present value of the cumulative change in the expected future cash flows on the variable leg of the interest rate swap
- bThe present value of the cumulative change in the expected future interest cash flows on the variable-rate asset or liability.
815-30-35-20
Because the focus of a cash flow hedge is on whether the hedging relationship achieves offsetting changes in cash flows, if the variability of the hedged cash flows of the variable-rate asset or liability is based solely on changes in a variable-rate index, the present value of the cumulative changes in expected future cash flows on both the variable-rate leg of the interest rate swap and the variable-rate asset or liability shall be calculated using the discount rates applicable to determining the fair value of the interest rate swap.
815-30-35-22
The change-in-variable-cash-flows method will result in a perfectly effective hedge if all of the following conditions are met:
- aThe variable-rate leg of the interest rate swap and the hedged variable cash flows of the asset or liability are based on the same interest rate index (for example, three-month London Interbank Offered Rate (LIBOR) swap rate).
- bThe interest rate reset dates applicable to the variable-rate leg of the interest rate swap and to the hedged variable cash flows of the asset or liability are the same.
- cThe hedging relationship does not contain any other basis differences (for example, if the variable leg of the interest rate swap contains a cap and the variable-rate asset or liability does not).
- dThe likelihood of the obligor not defaulting is assessed as being probable.
815-30-35-23
However, a hedge would not be perfectly effective if any basis differences existed. For example, this would be expected to result from either of the following conditions, among others:
- aA difference in the indexes used to determine cash flows on the variable leg of the interest rate swap (for example, the three-month U.S. Treasury rate) and the hedged variable cash flows of the asset or liability (for example, three-month LIBOR)
- bA mismatch between the interest rate reset dates applicable to the variable leg of the interest rate swap and the hedged variable cash flows of the hedged asset or liability.
815-30-35-24
Example 15 (see paragraph 815-30-55-91) illustrates the application of the change-in-variable-cash-flows method.
815-30-35-25
An entity shall assess hedge effectiveness under the hypothetical-derivative method by comparing the following amounts:
- aThe change in fair value of the actual interest rate swap designated as the hedging instrument
- bThe change in fair value of a hypothetical interest rate swap having terms that identically match the critical terms of the floating-rate asset or liability, including all of the following:
- 1The same notional amount
- 2The same repricing dates
- 3The same index (that is, the index on which the hypothetical interest rate swap's variable rate is based matches the index on which the asset or liability's variable rate is based)
- 4Mirror image caps and floors
- 5A zero fair value at the inception of the hedging relationship.
- 1
815-30-35-26
Essentially, the hypothetical derivative would need to satisfy all of the applicable conditions in paragraphs 815-20-25-104 and 815-20-25-106 necessary to qualify for use of the shortcut method except the criterion in paragraph 815-20-25-104(e). Thus, the hypothetical interest rate swap would be expected to perfectly offset the hedged cash flows. Because the requirements of paragraph 815-20-25-104(e) were developed with an emphasis on fair value hedging relationships, they do not fit the more general principle that the hypothetical derivative in a cash flow hedging relationship should be expected to perfectly offset the hedged cash flows.
815-30-35-27
The change in the fair value of the perfect hypothetical interest rate swap can be regarded as a proxy for the present value of the cumulative change in expected future cash flows on the hedged transaction.
815-30-35-29
The determination of the fair value of both the perfect hypothetical interest rate swap and the actual interest rate swap shall use discount rates based on the relevant interest rate swap curves.
815-30-35-31
An entity shall assess hedge effectiveness under the change-in-fair-value method by comparing the following amounts:
- aThe present value of the cumulative change in expected variable future interest cash flows that are designated as the hedged transactions
- bThe cumulative change in the fair value of the interest rate swap designated as the hedging instrument.
815-30-35-32
The discount rates applicable to determining the fair value of the interest rate swap designated as the hedging instrument shall also be applied to the computation of present values of the cumulative changes in the hedged cash flows.
815-30-35-33
If an entity concludes under paragraphs 815-20-25-129 through 25-129A that the hedging relationship may not be considered to be perfectly effective, the entity shall assess hedge effectiveness by comparing the following amounts:
- aThe change in fair value of the actual hedging instrument
- bThe change in fair value of a perfectly effective hypothetical hedging instrument. That hypothetical hedging instrument shall have terms that meet the four conditions listed in paragraphs 815-20-25-129 through 25-129A.
815-30-35-34
The change in fair value of the hypothetical hedging instrument can be regarded as a proxy for the present value of the cumulative change in expected future cash flows on the hedged transaction(s).
815-30-35-37A
Paragraph superseded by Accounting Standards Update No. 2025-09.
If the designated hedged risk changes during the life of a hedging relationship, an entity may continue to apply hedge accounting if the hedging instrument is highly effective at achieving offsetting cash flows attributable to the revised hedged risk. The guidance in paragraph 815-20-55-56 does not apply to changes in the hedged risk for a cash flow hedge of a forecasted transaction.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7| Editor's Note: The heading that precedes paragraph 815-30-35-37A will be amended upon transition as shown below, and the content of the paragraph will be superseded. |
| • > Change in the Contractually Specified Interest Rate for Forecasted Interest Payments on Choose-Your-Rate Debt |
815-30-35-37B
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7For a cash flow hedge of forecasted interest payments on choose-your-rate debt:- aWith respect to the forecasted issuance of a choose-your-rate debt instrument, an entity may choose to apply the guidance in paragraphs on a hedge-by-hedge basis if both of the following conditions are satisfied:
- 1The forecasted interest payments designated as being hedged relate to the forecasted issuance of a choose-your-rate debt instrument that will be classified as a liability.
- 2The entity designates the hedged risk as the variability in cash flows attributable to changes in a contractually specified interest rate in accordance with paragraph 815-20-25-19A(b).
- 1
- bWith respect to an existing choose-your-rate debt instrument or replacement debt, an entity may choose to apply the guidance in paragraphs on a hedge-by-hedge basis if both of the following conditions are satisfied:
- 1The forecasted interest payments designated as being hedged have begun to accrue and relate to an existing choose-your-rate debt or replacement debt (see paragraph 815-30-35-37K for additional guidance on replacement debt) instrument classified as a liability.
- 2The entity designates the hedged risk as the variability in cash flows attributable to changes in a contractually specified interest rate.
- 1
815-30-35-37C
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7In a cash flow hedge of forecasted interest payments that meets the conditions described in paragraph 815-30-35-37B(a), an entity shall designate the contractually specified interest rate (and interest rate tenor) as the entity’s best estimate of the interest rate index (and interest rate tenor) that it will initially select for the first interest period when the choose-your-rate debt instrument is issued. The currently designated best estimate of the interest rate index (and interest rate tenor) shall be considered the interest rate index (and interest rate tenor) upon which interest will accrue over the entire hedge period for purposes of assessing hedge effectiveness during the period before the debt is issued. The selection of an interest rate index (and interest rate tenor) in a subsequent period that alters the number and timing of the hedged forecasted interest payments within the hedge period shall not result in an automatic dedesignation of the hedging relationship.815-30-35-37D
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7When designating the hedged risk in a cash flow hedge of forecasted interest payments that meets the conditions described in paragraph 815-30-35-37B(a), an entity shall document the interest rate indexes (and interest rate tenors) that are included in choose-your-rate debt being offered in the market. If the entity determines that it is probable that it will issue choose-your-rate debt and initially select one of those documented interest rate indexes (and interest rate tenors) for the first interest period when the choose-your-rate debt instrument is issued, and if all of the other requirements of hedge accounting are met, hedge accounting may be applied. 815-30-35-37E
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7If, during the forecast period, the entity’s best estimate of the interest rate index (and interest rate tenor) that it will initially select for the first interest period when the choose-your-rate debt instrument is issued changes to another rate that was documented at hedge inception, the entity shall apply the guidance in paragraphs to determine whether hedge accounting can continue. If the entity determines that it is probable that the interest rate index (and interest rate tenor) that it will initially select for the first interest period when the choose-your-rate debt instrument is issued will not be a rate that was documented at hedge inception or if the entity determines that it is probable that it will not issue choose-your-rate debt, the entity shall immediately reclassify the gain or loss on the hedging instrument reported in accumulated other comprehensive income into earnings in accordance with paragraph 815-30-40-5. The entity also shall consider whether it has demonstrated a pattern of determining that hedged forecasted transactions are probable of not occurring and the propriety of using hedge accounting in the future for similar forecasted transactions in accordance with paragraph 815-30-40-5. 815-30-35-37F
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7If the best estimate of the interest rate index (and interest rate tenor) that the entity will select when the choose-your-rate debt instrument is issued changes to another rate that was documented in accordance with paragraph 815-30-35-37D during the forecast period, the entity shall perform a final retrospective assessment of hedge effectiveness on the basis of changes in cash flows attributable to the previous best estimate of the interest rate. If the entity concludes on the basis of that retrospective assessment that the hedging relationship was not highly effective in having achieved offsetting cash flows, hedge accounting may not be applied during that period (that is, the overall change in the fair value of the hedging instrument for that period shall be recognized in earnings). However, the hedging relationship may continue if there is an expectation that the relationship will be highly effective in achieving offsetting cash flows in future periods and all other hedge accounting requirements are met. In that circumstance, the entity shall begin prospectively assessing hedge effectiveness on the basis of changes in cash flows attributable to the new best estimate of the interest rate in the period in which the best estimate of the interest rate changes.815-30-35-37G
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7In performing a prospective assessment with the new best estimate of the interest rate index (and interest rate tenor), the entity shall create the terms of the instrument used to estimate changes in the cash flows attributable to the new best estimate of the interest rate (under the originally designated method, for example, the hypothetical derivative method or another acceptable method in Subtopic 815-30) on the basis of market data as of the inception of the hedging relationship as if the new best estimate of the interest rate had been designated for the entire hedge period. If the best estimate of the interest rate does not change again, all subsequent retrospective and prospective assessments of hedge effectiveness shall be performed using the currently designated best estimate of the interest rate. With respect to the timing, an entity shall perform its assessments of effectiveness in a manner consistent with paragraph 815-20-25-3(b)(2)(iv)(02).815-30-35-37H
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7After the choose-your-rate debt instrument is issued and the entity chooses the first interest rate index (and interest rate tenor) upon which interest will accrue, the entity shall no longer apply the guidance in paragraphs . Instead, if the entity continues to apply hedge accounting, it shall apply the guidance on existing choose-your-rate debt and related replacement debt (if applicable) in accordance with paragraphs and update its hedge documentation without dedesignating the hedging relationship. Example 28 (paragraph 815-30-55-171) illustrates how an entity should transition from the guidance on the forecasted issuance of choose-your-rate debt to the guidance on choose-your-rate debt and related replacement debt.815-30-35-37I
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7In a cash flow hedge of forecasted interest payments that meets the conditions in paragraph 815-30-35-37B(b), an entity shall designate the contractually specified interest rate (and interest rate tenor) as the then-selected interest rate index (and interest rate tenor). The currently designated interest rate index (and interest rate tenor) shall be considered the interest rate index (and interest rate tenor) upon which interest will accrue over the entire hedge period for purposes of assessing hedge effectiveness. The selection of an interest rate index (and interest rate tenor) in a subsequent period that alters the number and timing of the hedged forecasted interest payments within the hedge period shall not result in an automatic dedesignation of the hedging relationship as long as the selected interest rate index (and interest rate tenor) is one of the options included in the original existing choose-your-rate debt instrument as documented in accordance with paragraph 815-30-35-37J.815-30-35-37J
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7When designating the hedged risk in a cash flow hedge of forecasted interest payments that meets the conditions described in paragraph 815-30-35-37B(b), an entity shall document the interest rate indexes (and interest rate tenors) that are included in the existing choose-your-rate debt instrument. If the entity determines that it is probable that the forecasted interest payments related to the existing choose-your-rate debt instrument or replacement debt will occur at one of the documented interest rate indexes (and interest rate tenors) during the hedge period and all of the other requirements of hedge accounting are met, hedge accounting may be applied. 815-30-35-37K
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7An entity may designate the forecasted interest payments in a manner that includes debt that is expected to replace existing choose-your-rate debt. If the contractually specified interest rate at which interest is accruing on the replacement debt matches one of the interest rate index (and interest rate tenor) options included in the original choose-your-rate debt instrument that was outstanding when the first hedged interest payment began to accrue, the forecasted interest payments on the replacement debt shall be considered the hedged forecasted transactions without dedesignating the hedging relationship. If it becomes probable that the interest rate index (and interest rate tenor) at which interest will accrue on the replacement debt will not match one of the interest rate index (and interest rate tenor) options included in the original choose-your-rate debt instrument that was outstanding when the hedging relationship was initially designated, or that the replacement debt will be fixed-rate debt, the entity shall discontinue the application of hedge accounting and immediately reclassify the gain or loss on the hedging instrument recognized in accumulated other comprehensive income into earnings in accordance with paragraph 815-30-40-5. The entity also shall consider whether it has demonstrated a pattern of determining that hedged forecasted transactions are probable of not occurring and the propriety of using hedge accounting in the future for similar forecasted transactions in accordance with paragraph 815-30-40-5.815-30-35-37L
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7If the contractually specified interest rate in the hedging relationship is changed in accordance with paragraph 815-30-35-37I, the entity shall perform a final retrospective assessment of hedge effectiveness that is based on changes in cash flows attributable to the previously selected contractually specified interest rate for the last period in which interest was accruing at that interest rate. If the entity concludes on the basis of that retrospective assessment that the hedging relationship was not highly effective in having achieved offsetting cash flows, hedge accounting may not be applied during that period (that is, the change in the fair value of the hedging instrument for that period is recognized in earnings). However, the hedging relationship may continue if there is an expectation that the relationship will be highly effective in achieving offsetting cash flows in future periods and all other hedge accounting requirements are met. The entity shall begin prospectively assessing hedge effectiveness on the basis of changes in cash flows attributable to the newly selected contractually specified interest rate in the period in which interest begins accruing at that newly selected interest rate.815-30-35-37M
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7In performing a prospective assessment with the newly selected contractually specified interest rate, the entity shall create the terms of the instrument used to estimate changes in the cash flows attributable to the newly selected contractually specified interest rate (under the originally designated method, for example, the hypothetical derivative method or another acceptable method in Subtopic 815-30) on the basis of market data as of the inception of the hedging relationship as if the newly selected contractually specified interest rate had been designated for the entire hedge period. All subsequent retrospective and prospective assessments of hedge effectiveness shall be performed using the currently designated interest rate. With respect to the timing, an entity shall perform its assessments of effectiveness in a manner consistent with paragraph 815-20-25-3(b)(2)(iv)(02).Reclassifications from Accumulated Other Comprehensive Income into Earnings
815-30-35-38
Amounts in accumulated other comprehensive income that are included in the assessment of effectiveness shall be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings (for example, when a forecasted sale actually occurs) and shall 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. If an entity excludes a component of a hedging instrument from the assessment of effectiveness, an entity shall apply the guidance in paragraphs .
815-30-35-39
If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gains and losses in accumulated other comprehensive income that are included in the assessment of effectiveness shall be reclassified into earnings in the same period or periods during which the asset acquired or liability incurred affects earnings (such as in the periods that depreciation expense, interest expense, or cost of sales is recognized).
815-30-35-40
However, if an entity expects at any time that continued reporting of a loss in accumulated other comprehensive income would lead to recognizing a net loss on the combination of the hedging instrument and the hedged transaction (and related asset acquired or liability incurred) in one or more future periods, a loss shall be reclassified immediately into earnings for the amount that is not expected to be recovered.
815-30-35-41
For example, a loss shall be reported in earnings for a derivative instrument that is designated as hedging the forecasted purchase of inventory to the extent that the cost basis of the inventory plus the related amount reported in accumulated other comprehensive income exceeds the amount expected to be recovered through sales of that inventory. (Impairment guidance is provided in paragraphs .)
815-30-35-41A
An entity may designate a hedging derivative with periodic cash settlements and a non-zero fair value at hedge inception as the hedging instrument in a qualifying cash flow hedging relationship. In this situation, amounts related to the initial fair value that are recorded in other comprehensive income during the hedging relationship shall be reclassified from accumulated other comprehensive income to earnings on a systematic and rational basis over the periods during which the hedged forecasted transactions affect earnings. Amounts reclassified to earnings shall be presented in the same income statement line item as the earnings effect of the hedged item. This guidance applies to both option-based and non-option-based derivatives designated as hedging instruments in a cash flow hedge.
815-30-35-41B
This paragraph illustrates a method of reclassifying amounts from accumulated other comprehensive income to earnings when an option-based derivative is designated as a hedging instrument and the assessment of effectiveness is based on total changes in the derivative's cash flows. Those amounts include changes in fair value related to the derivative's initial intrinsic value in accordance with paragraph 815-30-35-41A. For example, the fair value of a single cap at the inception of a hedging relationship of interest rate risk on variable-rate debt with quarterly interest payments over the next two years should be allocated to the respective caplets within the single cap on a fair value basis at the inception of the hedging relationship. The change in each respective allocated fair value amount should be reclassified out of accumulated other comprehensive income into earnings when each of the hedged forecasted transactions (the eight interest payments) affects earnings. Because the amount in accumulated other comprehensive income is a net amount composed of both derivative instrument gains and derivative instrument losses, the change in the respective allocated fair value amount for an individual caplet that is reclassified out of accumulated other comprehensive income into earnings may possibly be greater than the net amount in accumulated other comprehensive income.
815-30-35-41C
This guidance has no effect on the accounting for fair value hedging relationships. In addition, in determining the accounting for seemingly similar cash flow hedging relationships, it would be inappropriate to analogize to this guidance.
815-30-35-42
Existing requirements in generally accepted accounting principles (GAAP) for assessing asset impairment or credit losses or recognizing an increased obligation apply to an asset or liability that gives rise to variable cash flows (such as a variable-rate financial instrument) for which the variable cash flows (the forecasted transactions) have been designated as being hedged and accounted for pursuant to paragraphs 815-30-35-3 and . Those impairment or credit loss requirements shall be applied each period after hedge accounting has been applied for the period, pursuant to those paragraphs. The fair value or expected cash flows of a hedging instrument shall not be considered in applying those requirements. The gain or loss on the hedging instrument in accumulated other comprehensive income shall, however, be accounted for as discussed in paragraphs .
815-30-35-43
If, under existing requirements in GAAP, an asset impairment loss or writeoff due to credit losses is recognized on an asset or an additional obligation is recognized on a liability to which a hedged forecasted transaction relates, any offsetting or corresponding net gain related to that transaction in accumulated other comprehensive income shall be reclassified immediately into earnings. Similarly, if a recovery is recognized on the asset or liability to which the forecasted transaction relates, any offsetting net loss that has been accumulated in other comprehensive income shall be reclassified immediately into earnings.
815-30-35-44
If the reclassification to earnings of the amount in accumulated comprehensive income resulting from a cash flow hedge of debt is required under this Subsection when that debt is extinguished, the amount reclassified from accumulated comprehensive income to earnings shall be excluded from extinguishment gain or loss.
815-30-35-45
If the variable-rate interest on a specific borrowing is associated with an asset under construction and capitalized as a cost of that asset, the amounts in accumulated other comprehensive income related to a cash flow hedge of the variability of that interest shall be reclassified into earnings over the depreciable life of the constructed asset, because that depreciable life coincides with the amortization period for the capitalized interest cost on the debt.
Hedging Relationship's Timing Involves Uncertainty within a Range
815-30-35-46
For forecasted transactions whose timing involves some uncertainty within a range, paragraph 815-20-25-16(c) states that, as long as it remains probable that the forecasted transaction will occur by the end of the originally specified time period, cash flow hedge accounting for that hedging relationship shall continue.
815-30-40Derecognition
Source downloaded: .Record version 039b5efa84d0. Effective date must be checked in the source.
Discontinuing Hedge Accounting
815-30-40-1
An entity shall discontinue prospectively the accounting specified in paragraphs 815-30-35-3 and for an existing hedge if any one of the following occurs:
- a Any criterion in Section 815-30-25 is no longer met.
- b The derivative instrument expires or is sold, terminated, or exercised.
- c The entity removes the designation of the cash flow hedge.
815-30-40-1A
For the purposes of applying the guidance in paragraph 815-30-40-1, a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument.
815-30-40-2
In the circumstances discussed in paragraph 815-30-40-1, the net gain or loss shall remain in accumulated other comprehensive income and be reclassified into earnings as specified in paragraphs . Example 16 (see paragraph 815-30-55-94) illustrates the application of paragraph 815-30-35-3 if a hedging relationship is terminated.
815-30-40-3
Furthermore, the entity may elect to designate prospectively a new hedging relationship with a different hedging instrument or, in the circumstances described in paragraph 815-30-40-1(a) and 815-30-40-1(c), a different hedged transaction or a hedged item if the hedging relationship meets the applicable criteria for a cash flow hedge or a fair value hedge.
815-30-40-4
The net derivative instrument gain or loss related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period (as documented at the inception of the hedging relationship) or within an additional two-month period of time thereafter, except as indicated in the following sentence. In rare cases, the existence of extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of the reporting entity may cause the forecasted transaction to be probable of occurring on a date that is beyond the additional two-month period of time, in which case the net derivative instrument gain or loss related to the discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income until it is reclassified into earnings pursuant to paragraphs .
815-30-40-5
If it is probable that the hedged forecasted transaction will not occur either by the end of the originally specified time period or within the additional two-month period of time and the hedged forecasted transaction also does not qualify for the exception described in the preceding paragraph, that derivative instrument gain or loss reported in accumulated other comprehensive income shall be reclassified into earnings immediately. A pattern of determining that hedged forecasted transactions are probable of not occurring would call into question both an entity's ability to accurately predict forecasted transactions and the propriety of using hedge accounting in the future for similar forecasted transactions.
815-30-40-6
Derivative instrument gains and losses that had initially been reported in other comprehensive income as a result of a cash flow hedge and then reclassified to earnings (because the entity subsequently concluded that it was probable that the forecasted transaction would not occur within the originally specified time period or the additional period of time described in paragraph 815-30-40-4) shall not later be reclassified out of earnings and back into accumulated other comprehensive income due to a reassessment of probabilities.
815-30-40-6A
When applying the guidance in paragraph 815-20-25-83A, if the hedged forecasted transaction is probable of not occurring, any amounts remaining in accumulated other comprehensive income related to amounts excluded from the assessment of effectiveness shall be recorded in earnings in the current period. For all other discontinued cash flow hedges, any amounts associated with the excluded component remaining in accumulated other comprehensive income shall be recorded in earnings when the hedged forecasted transaction affects earnings.
Alterations or Terminations of Offsetting Third-Party Derivative Instruments
815-30-40-7
Paragraph 815-20-25-62 provides guidance on internal derivatives as hedging instruments in cash flow hedges of foreign exchange risk. Paragraph 815-20-25-63 states that, if an issuing affiliate alters or terminates any offsetting third-party derivative instrument (which should be rare), the hedging affiliate prospectively shall cease hedge accounting for the internal derivatives that are offset by that third-party derivative instrument.
815-30-45Other Presentation Matters
Source downloaded: .Record version 45fba36b6356. Effective date must be checked in the source.
815-30-50Disclosure
Source downloaded: .Record version 7d73a1fa95d0. Effective date must be checked in the source.
815-30-50-1
See Section 815-10-50 for overall guidance on disclosures. An entity's disclosures for every annual and interim reporting period for which a statement of financial position and a statement of financial performance is presented shall include all of the following for derivative instruments that have been designated and have qualified as cash flow hedging instruments and for the related hedged transactions:
- a
- bA description of the transactions or other events that will result in the reclassification into earnings of gains and losses that are reported in accumulated other comprehensive income
- cThe estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive income at the reporting date that is expected to be reclassified into earnings within the next 12 months
- dThe maximum length of time over which the entity is hedging its exposure to the variability in future cash flows for forecasted transactions excluding those forecasted transactions related to the payment of variable interest on existing financial instruments
- e
815-30-50-2
As part of the disclosures of accumulated other comprehensive income, pursuant to paragraphs 220-10-45-14 through 45-14A, an entity shall separately disclose all of the following:
- aThe beginning and ending accumulated derivative instrument gain or loss
- bThe related net change associated with current period hedging transactions
- cThe net amount of any reclassification into earnings
- dThe difference between the change in fair value of an excluded component and the initial value of that excluded component recognized in earnings under a systematic and rational method in accordance with paragraph 815-20-25-83A.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1As part of the disclosures of accumulated other comprehensive income, pursuant to paragraphs 220-10-45-14 through 45-14A, an entity shall separately disclose all of the following in interim and annual reporting periods:- aThe beginning and ending accumulated derivative instrument gain or loss
- bThe related net change associated with current period hedging transactions
- cThe net amount of any reclassification into earnings
- dThe difference between the change in fair value of an excluded component and the initial value of that excluded component recognized in earnings under a systematic and rational method in accordance with paragraph 815-20-25-83A.
815-30-50-3
For guidance on qualitative disclosures, see paragraph 815-10-50-5.
Disclosed Amount to Be Reclassified into Earnings
815-30-50-4
The amount required to be disclosed under paragraph 815-30-50-1(c) (the estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive income at the reporting date that is expected to be reclassified into earnings within the next 12 months) could be greater than or less than the net amount reported in accumulated other comprehensive income.
815-30-50-5
To measure the amount of other comprehensive income to be reclassified into earnings in the coming 12 months if multiple cash flow exposures are designated as the hedged items for a single derivative instrument, the total amount reported in other comprehensive income (as determined in accordance with paragraph 815-30-35-3(b)) for the hedging relationship first shall be allocated to each of the forecasted transactions (hedged items) within the hedging relationship.
815-30-50-6
The allocation method used shallbe applied consistently. After the amount reported in other comprehensive income has been allocated to each of the forecasted transactions within the hedging relationship, the entity shall sum those estimated amounts to be reclassified into earnings in the coming 12 months.
815-30-55Implementation Guidance and Illustrations
Source downloaded: .Record version 54e232a1c1a1. Effective date must be checked in the source.
Implementation Guidance
815-30-55-1
Paragraph 815-30-50-5 provides guidance on measuring the amount of other comprehensive income to be reclassified into earnings in the coming 12 months if multiple cash flow exposures are designated as the hedged items for a single derivative instrument. If interest rate or commodity swaps are used for cash flow hedges, in effect a single derivative is being used to hedge multiple hedged forecasted transactions because a swap involves multiple cash flows (like a series of forward contracts). For instance, a five-year interest rate swap may be designated as the hedging instrument to hedge the variability in cash flows for each of the resets in a five-year variable-rate borrowing. The fair value of a swap may be the net of both positive discounted cash flows (that is, the right to receive future payments) and negative discounted cash flows (that is, the obligation to make future payments). This could happen, for example, if nearby forward rates were below the fixed rate on the swap and far-term forward rates were above the fixed rate on the swap, in which case an entity could have an expectation of having to make cash outflows on the swap for nearby exposures and to receive cash inflows on the swap for the far-term exposures.
Illustrations
815-30-55-1A
This Example illustrates the application of the guidance in Subtopic 815-20 and this Subtopic to assessing effectiveness for a cash flow hedge of a forecasted purchase of inventory with a forward contract in which the forward contract index differs from the index of the underlying hedged transaction. Assume that the entity elected to perform subsequent quarterly hedge effectiveness assessments on a quantitative basis and that all hedge documentation requirements were satisfied at inception.
815-30-55-2
Entity G forecasts the purchase of 500,000 pounds of Brazilian coffee for U.S. dollars in 6 months. The agreement outlining purchase terms between Entity G and its supplier contains a contractually specified component referencing a Brazilian coffee index denominated in U.S. dollars. Entity G designates the variability in cash flows related to its forecasted purchase of Brazilian coffee attributable to changes in the contractually specified component (Brazilian coffee index) as the hedged risk. Rather than acquire a derivative instrument based on Brazilian coffee, Entity G enters into a 6-month forward contract to purchase 500,000 pounds of Colombian coffee for U.S. dollars and designates the forward contract as a hedging instrument in a cash flow hedge of the variability in cash flows attributable to changes in the contractually specified Brazilian coffee index component of its forecasted purchase of Brazilian coffee.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity G forecasts the purchase of 500,000 pounds of Brazilian coffee for U.S. dollars in 6 months. The agreement outlining purchase terms between Entity G and its supplier contains a pricing formula that explicitly references the Brazilian coffee index denominated in U.S. dollars. Thus, the purchase price will be based on that coffee index as of the delivery date (that is, in six months). Entity G designates the variability in cash flows related to its forecasted purchase of Brazilian coffee attributable to changes in the Brazilian coffee index as the hedged risk. Entity G determines that the Brazilian coffee index explicitly referenced in the agreement’s pricing formula is clearly and closely related to the forecasted purchase of 500,000 pounds of Brazilian coffee and therefore meets the conditions in paragraph 815-20-25-22C(b)(1). Rather than acquire a derivative instrument based on Brazilian coffee, Entity G enters into a 6-month forward contract to purchase 500,000 pounds of Colombian coffee for U.S. dollars and designates the forward contract as a hedging instrument in a cash flow hedge of the variability in cash flows attributable to changes in the explicitly referenced Brazilian coffee index component of its forecasted purchase of Brazilian coffee. 815-30-55-3
Entity G bases its assessment of hedge effectiveness on changes in forward prices, with the resulting gain or loss discounted to reflect the time value of money. Both at inception and on an ongoing basis, Entity G could assess the effectiveness of the hedge by comparing changes in the expected cash flows from the Colombian coffee forward contract with the expected net change in cash outflows attributable to changes in the contractually specified component for purchasing the Brazilian coffee for different market prices. (A simpler method that should produce the same results would consider the expected future correlation of the prices of Brazilian and Colombian coffee, based on the correlation of those prices over past six-month periods.)
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity G bases its assessment of hedge effectiveness on changes in forward prices, with the resulting gain or loss discounted to reflect the time value of money. Both at inception and on an ongoing basis, Entity G could assess the effectiveness of the hedge by comparing changes in the expected cash flows from the Colombian coffee forward contract with the expected net change in cash outflows attributable to changes in the price index explicitly referenced in the agreement for purchasing the Brazilian coffee for different market prices. (A simpler method that should produce the same results would consider the expected future correlation of the prices of Brazilian and Colombian coffee, based on the correlation of those prices over past six-month periods.) 815-30-55-4
In assessing hedge effectiveness on an ongoing basis, Entity G also must consider the extent of offset between the change in expected cash flows on its Colombian coffee forward contract and the expected net change in expected cash flows for the forecasted purchase of Brazilian coffee attributable to changes in the contractually specified component. Both changes would be measured on a cumulative basis for actual changes in the forward price of the respective coffees during the hedge period.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7In assessing hedge effectiveness on an ongoing basis, Entity G also must consider the extent of offset between the change in expected cash flows on its Colombian coffee forward contract and the expected net change in expected cash flows for the forecasted purchase of Brazilian coffee attributable to changes in the designated price component (Brazilian coffee index).Both changes would be measured on a cumulative basis for actual changes in the forward price of the respective coffees during the hedge period. 815-30-55-5
See Topic 820 (including paragraph 820-10-55-13) for a discussion of expected cash flows.
815-30-55-6
Because the only difference between the forward contract and forecasted purchase relates to the type of coffee (Colombian versus Brazilian), Entity G could consider the changes in the cash flows on a forward contract for Brazilian coffee to be a measure of perfectly offsetting changes in cash flows for its forecasted purchase of Brazilian coffee. For example, for given changes in the U.S. dollar prices of six-month and three-month Brazilian and Colombian contracts, Entity G could compute the effect of a change in the price of coffee on the expected cash flows of its forward contract on Colombian coffee and of a forward contract for Brazilian coffee as follows.
Estimate of Change in Cash Flows Hedging Instrument: Forward Contract on Colombian Coffee Estimate of Forecasted Transaction: Forward Contract on Brazilian Coffee Forward price of Colombian and Brazilian coffee: At hedge inception—6-month price $2.54 $2.43 3 months later—3-month price 2.63 2.53 Cumulative change in price—gain $0.09 $0.10 "× 500,000 pounds of coffee" " × 500,000 " " × 500,000 " Estimate of change in cash flows " $45,000 " " $50,000 "
815-30-55-7
See Topic 820 (including paragraph 820-10-55-13) for a discussion of expected cash flows.
815-30-55-8
Using the amounts in paragraph 815-30-55-6, Entity G could evaluate effectiveness 3 months into the hedge on its first subsequent quarterly effectiveness assessment testing date by comparing the $45,000 change on its Colombian coffee contract with what would have been a perfectly offsetting change in cash flow for its forecasted purchase—the $50,000 change on an otherwise identical forward contract for Brazilian coffee. Entity G concludes that the hedging relationship would be highly effective, and it would record the $45,000 change in the fair value of the forward contract on Colombian coffee in other comprehensive income.
- a
- b
815-30-55-9
This Example illustrates the application of the guidance in Subtopic 815-20 and this Subtopic to assessing effectiveness for a cash flow hedge with a basis swap. Assume that the entity elects to perform subsequent hedge effectiveness assessments on a quantitative basis and that all hedge documentation requirements were satisfied at inception.
815-30-55-10
Entity H has a 5-year, $100,000 variable-rate asset and a 7-year, $150,000 variable-rate liability. The interest on the asset is payable by the counterparty at the end of each month based on the prime rate as of the first of the month. The interest on the liability is payable by Entity H at the end of each month based on London Interbank Offered Rate (LIBOR) as of the tenth day of the month (the liability's anniversary date). The reference rates for both the asset and the liability are contractually specified. Entity H enters into a 5-year interest rate swap to pay interest at the prime rate and receive interest at LIBOR at the end of each month based on a notional amount of $100,000. Both rates are determined as of the first of the month. Entity H designates the interest rate swap as a hedge of 5 years of interest receipts on the $100,000 variable-rate asset and the first 5 years of interest payments on $100,000 of the variable-rate liability. The hedged risk is the variability in the contractually specified interest payments received on the asset and paid on the liability. Assume the likelihood of credit default and the likelihood of principal prepayments each is remote.
815-30-55-11
Entity H may not automatically assume that the hedge always will be highly effective at achieving offsetting changes in cash flows because the reset date on the receive leg of the interest rate swap differs from the reset date on the corresponding variable-rate liability. Both at hedge inception and on an ongoing basis, Entity H's assessment of expected effectiveness could be based on the extent to which changes in LIBOR have occurred during comparable 10-day periods in the past. Entity H's ongoing assessment of effectiveness would be on a cumulative basis and would incorporate the actual interest rate changes to date. There will be no perfect offset to the extent that the cumulative change in cash flows on the prime leg of the interest rate swap did not offset the cumulative change in expected cash flows on the asset, and the cumulative change in cash flows on the LIBOR leg of the interest rate swap did not offset the change in expected cash flows on the hedged portion of the liability. The terms of the interest rate swap, the asset, and the portion of the liability that is hedged are the same, with the exception of the reset dates on the liability and the receive leg of the interest rate swap. Thus, there will be no perfect offset in the hedging relationship if LIBOR has changed between the first of the month (the reset date for the interest rate swap) and the tenth of the month (the reset date for the liability).
815-30-55-12
See Topic 820 (including paragraph 820-10-55-13) for a discussion of expected cash flows.
815-30-55-13
This Example illustrates the application of the guidance in Subtopic 815-20 and this Subtopic to assessing effectiveness for a cash flow hedge of a forecasted sale with a forward contract. Assume that the hedge satisfied all of the criteria for hedge accounting at inception.
815-30-55-14
Entity I, a U.S. dollar (USD) functional currency entity, forecasts the sale of 10,000 units in Euros (EUR) of its principal product in 6 months to French customers for EUR 500,000. Entity I wants to hedge the cash flow exposure of the EUR sale related to changes in the USD-EUR exchange rate. It enters into a 6-month forward contract to exchange the EUR 500,000 it expects to receive in the forecasted sale for the USD equivalent specified in the forward contract and designates the forward contract as a cash flow hedge of the forecasted sale.
815-30-55-15
Entity I chooses to assess hedge effectiveness at inception and during the term of the hedge based on the following amounts:
- aChanges in the fair value of the forward contract attributable to changes in the USD-EUR spot rate
- bChanges in the present value of the current USD equivalent of the forecasted receipt of EUR 500,000.
815-30-55-16
Because the critical terms of the forward contract and the forecasted transaction are the same, presumably there would be perfect offset unless there is a reduction in the expected sales proceeds from the forecasted sales. Because Entity I is assessing effectiveness based on spot rates, it would exclude the change in the fair value of the forward contract attributable to changes in the difference between the forward rate and spot rate from the assessment of effectiveness and account for it through an amortization approach in accordance with paragraph 815-20-25-83A or a mark-to-market approach in accordance with paragraph 815-20-25-83B. Under either approach, the portion of the excluded component 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.
815-30-55-17
This Example illustrates the application of the guidance in Subtopic 815-20 and this Subtopic to an attempted hedge of a forecasted sale with a written call option.
815-30-55-18
Entity J forecasts the sale in 9 months of 100 units of product with a current market price of $95 per unit. Entity J's objective is to sell the upside potential associated with the forecasted sale by writing a call option for a premium. Entity J plans to use the premium from the call option as an offset to decreases in future cash inflows from the forecasted sale that will occur if the market price of the product decreases below $95. Accordingly, Entity J sells an at-the-money call option on 100 units of product with a strike price of $95 for a premium. The premium represents only the time value of the option. The option is exercisable at any time within nine months.
815-30-55-19
Entity J's objective of using the premium from the written call option as an offset to any decrease in future cash inflows does not meet the notion of effectiveness in this Subtopic. Future changes in the market price of the entity's product will not affect the premium that Entity J received, which is all related to time value in this example and thus is the maximum amount by which Entity J can benefit. That is, Entity J cannot expect the cash flows on the option to increase so that, at different price levels, a decrease in cash flows from the forecasted sale would be offset by an increase in cash flows on the option.
815-30-55-20
This Example illustrates the application of the guidance in paragraphs and this Subtopic to the accounting for a cash flow hedge of a forecasted sale of a commodity. The terms of the hedging derivative have been negotiated to match the terms of the forecasted transaction. Assume that there is no time value in the derivative instrument. Entity ABC has chosen to hedge the variability of the cash flows from the forecasted sale of the commodity instead of the changes in its fair value. 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.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7This Example illustrates the application of the guidance in paragraphs and this Subtopic to the accounting for a cash flow hedge of a forecasted sale of a commodity. The terms of the hedging derivative have been negotiated to match the terms of the designated price component of the forecasted transaction. Entity ABC has chosen to hedge the variability of the cash flows from the forecasted sale of the commodity instead of the changes in its fair value. For simplicity, the time value in the derivative instrument and 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. 815-30-55-21
Because there is no contractually specified component, Entity ABC hedges the risk of changes in its cash flows relating to changes in the sales price of a forecasted sale of 100,000 bushels of Commodity A by entering into a derivative instrument, Derivative Z. Entity ABC expects to sell the 100,000 bushels of Commodity A on the last day of Period 1. On the first day of Period 1, Entity ABC enters into Derivative Z and designates it as a cash flow hedge of the forecasted sale. Entity ABC neither pays nor receives a premium on Derivative Z (that is, its fair value is zero). Entity ABC expects that there will be perfect offset between the hedging instrument and the hedged item because all of the following conditions exist:
- aThe notional amount of Derivative Z is 100,000 bushels and the forecasted sale is for 100,000 bushels.
- bThe underlying of Derivative Z is the price of the same variety and grade of Commodity A that Entity ABC expects to sell (assuming delivery to Entity ABC's selling point).
- cThe settlement date of Derivative Z is the last day of Period 1 and the forecasted sale is expected to occur on the last day of Period 1.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity ABC seeks to hedge the variability of cash flows from the forecasted sale of Commodity A in the spot market at a future date. Accordingly, Entity ABC hedges the risk of changes in its cash flows relating to changes in the sales price of a forecasted sale of 100,000 bushels of Commodity A in the spot market by entering into a derivative instrument, Derivative DEF. Entity ABC expects to sell the 100,000 bushels of Commodity A on the last day of Period 1. On the first day of Period 1, Entity ABC enters into Derivative DEF and designates it as a cash flow hedge of changes in the DEF index component of the forecasted sales price. Entity ABC determines that the DEF index is clearly and closely related (as described in paragraph 815-10-15-32(a) through (b)) to Commodity A in the pertinent spot market and concludes that the conditions in paragraph 815-20-25-22C(a) are met. Entity ABC expects that there will be perfect offset between the hedging instrument and the hedged item because all of the following conditions exist: - aThe notional amount of Derivative DEF is 100,000 bushels and the forecasted sale is for 100,000 bushels.
- bThe underlying of Derivative DEF is the same as the designated price component of Commodity A that Entity ABC expects to sell.
- cThe settlement date of Derivative DEF is the last day of Period 1 and the forecasted sale is expected to occur on the last day of Period 1.
- dEntity ABC neither pays nor receives a premium on Derivative DEF (that is, its fair value is zero).
815-30-55-22
At inception of the hedge, the expected sales price of 100,000 bushels of Commodity A is $1,100,000. On the last day of Period 1, the fair value of Derivative Z has increased by $25,000, and the expected sales price of 100,000 bushels of Commodity A has decreased by $25,000. Both the sale of 100,000 bushels of Commodity A and the settlement of Derivative Z occur on the last day of Period 1. The following table illustrates the accounting, including the net effect on earnings and other comprehensive income, for the situation described.
Debit (Credit) Cash Derivative Other Comprehensive Income Earnings(a) Recognize change in fair value of derivative " $25,000 " " $(25,000)" Recognize revenue from sale " $1,075,000 " " $(1,075,000)" Recognize settlement of derivative "25,000 " " (25,000)" Reclassify change in fair value of derivative to earnings "25,000" " (25,000)" Total " $1,100,000 " $- $- " $(1,100,000)" (a) The change in fair value of the hedging derivative is presented in the same income statement line item as the earnings effect of the hedged item.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7At inception of the hedge, the expected sales price of 100,000 bushels of Commodity A is $1,100,000. On the last day of Period 1, the fair value of Derivative DEF has increased by $25,000, and the expected sales price of 100,000 bushels of Commodity A has decreased by $25,000 because of changes attributable to the DEF index. Both the sale of 100,000 bushels of Commodity A and the settlement of Derivative DEF occur on the last day of Period 1. The following table illustrates the accounting, including the net effect on earnings and other comprehensive income, for the situation described. - Debit (Credit) Cash Derivative Other Comprehensive Income Earnings(a) Recognize change in fair value of derivative " $25,000 " " $(25,000)" Recognize revenue from sale " $1,075,000 " " $(1,075,000)" Recognize settlement of derivative "25,000 " " (25,000)" Reclassify change in fair value of derivative to earnings "25,000" " (25,000)" Total " $1,100,000 " $- $- " $(1,100,000)" (a) The change in fair value of the hedging derivative is presented in the same income statement line item as the earnings effect of the hedged item.
815-30-55-23
At the inception of the hedge, Entity ABC anticipated that it would receive $1,100,000 from the sale of 100,000 bushels of Commodity A. This Example illustrates that by hedging the risk of changes in its cash flows relating to the forecasted sale of 100,000 bushels of Commodity A, Entity ABC still received a total of $1,100,000 in cash flows even though the sales price of Commodity A declined during the period.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7At inception of the hedge, Entity ABC anticipated that it would receive $1,100,000 from the sale of 100,000 bushels of Commodity A. This Example illustrates that by hedging the risk of cash flow variability attributable to changes in the DEF index component of the forecasted sale of 100,000 bushels of Commodity A, Entity ABC still received a total of $1,100,000 in cash flows even though the sales price of Commodity A declined during the period. 815-30-55-24
This Example demonstrates the mechanics of accounting for an interest rate swap used as a cash flow hedge of variable interest receipts in accordance with the guidance in Subtopic 815-20 and this Subtopic. It is not intended to demonstrate how to compute the fair value of an interest rate swap. As in Example 8 (see paragraph 815-25-55-40), the zero-coupon method is used to determine the fair values. (Unlike in that Example, the yield curve in this Example is assumed to be upward sloping, that is, interest rates are higher for payments due further into the future.) In this Example, the term, notional amount, and repricing date of the interest rate swap match the term, repricing date, and principal amount of the interest-bearing asset on which the hedged interest receipts are due. The swap terms are at the market (as described in paragraphs 815-20-25-104, 815-20-25-106, and 815-20-25-109), so it has a zero value at inception. Thus, the reporting entity is permitted to assume that the hedging relationship will achieve perfect offset in the variability of cash flows of the hedged item.
815-30-55-25
As discussed beginning in paragraph 815-20-25-102, a shortcut method can be used to produce the same reporting results as the method illustrated in this Example. This shortcut is appropriate only if the assumption of perfect offset applies for an interest rate swap used as a cash flow hedge of interest receipts on a variable-rate asset (or interest payments on a variable-rate liability). The steps in the shortcut method are as follows:
- aDetermine the difference between the variable rate to be paid on the interest rate swap and the variable rate to be received on the bonds.
- bCombine that difference with the fixed rate to be received on the interest rate swap.
- cCompute and recognize interest income using that combined rate and the variable-rate asset's principal amount. (Amortization of any purchase premium or discount on the asset must also be considered, although that complication is not incorporated in this Example.)
- dDetermine the fair value of the interest rate swap.
- eAdjust the carrying amount of the interest rate swap to its fair value and adjust other comprehensive income by an offsetting amount.
815-30-55-26
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.
815-30-55-27
On July 1, 20X1, Entity XYZ invests $10,000,000 in variable-rate corporate bonds that pay interest quarterly at a rate equal to the 3-month USD LIBOR rate plus 2.25 percent. The $10,000,000 principal will be repaid on June 30, 20X3.
815-30-55-28
Also on July 1, 20X1, Entity XYZ enters into a two-year receive-fixed, pay-variable interest rate swap and designates it as hedging instrument in a cash flow hedge of the variable-rate interest receipts on the corporate bonds. The risk designated as being hedged is the risk of variability in cash flows received attributable to changes in the contractually specified interest rate. The terms of the interest rate swap and the corporate bonds are shown in the following table.
Interest Rate Swap Corporate Bonds Trade date and borrowing date(a) "July 1, 20X1" "July 1, 20X1" Termination date "June 30, 20X3" "June 30, 20X3" Notional amount "$10,000,000 " "$10,000,000 " Fixed interest rate 6.65% Not applicable Variable interest rate(b) 3-month USD LIBOR 3-month USD LIBOR + 2.25% 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" "End of each calendar quarter through March 31, 20X3" (a) These terms need not match for the assumption of perfect offset to be appropriate. (See paragraphs 815-20-25-102 through 25-110.) (b) "Only the interest rate basis (for example, LIBOR) must match. The spread over LIBOR does not invalidate the assumption of perfect offset. "
815-30-55-29
Because the conditions described in paragraphs 815-20-25-104 and 815-20-25-106 are met, Entity XYZ is permitted to assume that there is perfect offset in the hedging relationship and to recognize in other comprehensive income the entire change in the fair value of the interest rate swap.
815-30-55-30
The three-month USD LIBOR rates in effect at the inception of the hedging relationship and at each of the quarterly reset dates are assumed to be as follows.
Reset Date 3-Month LIBOR Rate 7/1/X1 5.56% 9/30/X1 5.63% 12/31/X1 5.56% 3/31/X2 5.47% 6/30/X2 6.75% 9/30/X2 6.86% 12/31/X2 6.97% 3/31/X3 6.57%
815-30-55-31
Entity XYZ must reclassify to earnings the amount in accumulated other comprehensive income as each interest receipt affects earnings. In determining the amounts to reclassify each quarter, it is important to recognize that the interest rate swap does not hedge the bonds. Instead, it hedges the eight variable interest payments to be received. That is, each of the eight quarterly settlements on the swap is associated with an interest payment to be received on the bonds. Under the zero-coupon method discussed in paragraph 815-30-55-24, the present value of each quarterly settlement is computed separately. Because each payment occurs at a different point on the yield curve, a different interest rate must be used to determine its present value. As each individual interest receipt on the bonds is recognized in earnings, the fair value of the related quarterly settlement on the swap is reclassified to earnings. The fair values and changes in fair values of the interest rate swap and the effects on earnings and other comprehensive income for each quarter are as follows.
Swap Debit (Credit) Other Comprehensive Income Debit (Credit) Earnings Debit (Credit) Cash Debit (Credit) "July 1, 20X1" $- Interest accrued - Payment (receipt) " (27,250)" " $27,250 " Effect of change in rates " 52,100 " " $(52,100)" Reclassification to earnings " 27,250 " " $(27,250)" "September 30, 20X1" " 24,850 " " (24,850)" " $(27,250)" " $27,250 " Interest accrued 330 (330) Payment (receipt) " (25,500)" " $25,500 " Effect of change in rates " 74,120 " " (74,120)" Reclassification to earnings " 25,500 " " $(25,500)" "December 31, 20X1" " 73,800 " " (73,800)" " $(25,500)" " $25,500 " Interest accrued " 1,210 " " (1,210)" Payment receipt " (27,250)" " $27,250 " Effect of change in rates " 38,150 " " (38,150)" Reclassification to earnings " 27,250 " " $(27,250)" "March 31, 20X2" " 85,910 " " (85,910)" " $(27,250)" " $27,250 " Interest accrued " 1,380 " " (1,380)" Payment (receipt) " (29,500)" " $29,500 " Effect of change in rates " (100,610)" " 100,610 " Reclassification to earnings " 29,500 " " $(29,500)" "June 30, 20X2" " (42,820)" " 42,820 " " $(29,500)" " $29,500 " Interest accrued (870) 870 Payment (receipt) " 2,500 " " $(2,500)" Effect of change in rates " 8,030 " " (8,030)" Reclassification to earnings " (2,500)" " $2,500 " "September 30, 20X2" " (33,160)" " 33,160 " " $2,500 " " $(2,500)" Interest accrued (670) 670 Payment (receipt) " 5,250 " " $(5,250)" Effect of change in rates " 6,730 " " (6,730)" Reclassification to earnings " (5,250)" " $5,250 " "December 31, 20X2" " (21,850)" " 21,850 " " $5,250 " " $(5,250)" Interest accrued (440) 440 Payment (receipt) " 8,000 " " $(8,000)" Effect of change in rates " 16,250 " " (16,250)" Reclassification to earnings " (8,000)" " $8,000 " "March 31, 20X3" " 1,960 " " (1,960)" " $8,000 " " $(8,000)" Interest accrued 40 (40) Payment (receipt) " (2,000)" " $2,000 " Reclassification to earnings " 2,000 " " $(2,000)" "June 30, 20X3" $- $- " $(2,000)" " $2,000 "
815-30-55-32
The preceding table shows that, in each quarter, the net cash receipt or payment on the swap equals the income or expense to be recorded. The net effect on earnings of the interest on the bonds and the reclassification of gains or losses on the interest rate swap are presented in the same income statement line item as the earnings effect of the hedged item. The net earnings effect is shown in the following table.
Earnings For the Quarter Ending Interest on Bonds Gains (Losses) Reclassified from Other Comprehensive Income Net Effect 9/30/X1 " $195,250 " " $27,250 " " $222,500 " 12/31/X1 " 197,000 " " 25,500 " " 222,500 " 3/31/X2 " 195,250 " " 27,250 " " 222,500 " 6/30/X2 " 193,000 " " 29,500 " " 222,500 " 9/30/X2 " 225,000 " " (2,500)" " 222,500 " 12/31/X2 " 227,750 " " (5,250)" " 222,500 " 3/31/X3 " 230,500 " " (8,000)" " 222,500 " 6/30/X3 " 220,500 " " 2,000 " " 222,500 " Totals " $1,684,250 " " $95,750 " " $1,780,000 "
815-30-55-33
In this Example, the shortcut method described in paragraph 815-30-55-25 works as follows. The difference between the variable rate on the interest rate swap and the variable rate on the asset is a net receipt of 2.25 percent. That rate combined with the 6.65 percent fixed rate received on the interest rate swap is 8.9 percent. The computed interest income is $890,000 per year or $222,500 per quarter, which is the same as the amount in the table in the preceding paragraph.
815-30-55-40
This Example illustrates the effect on earnings and other comprehensive income of discontinuing a cash flow hedge by dedesignating the hedging derivative under paragraph 815-30-40-1(c) before the variability of the cash flows from the hedged forecasted transaction has been eliminated. It also discusses the effect that the location of a physical asset has on the effectiveness of a hedging relationship. 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.
815-30-55-41
On February 3, 20X1, Entity JKL forecasts the purchase of 100,000 bushels of corn on May 20, 20X1. The contract does not contain a contractually specified component, and Entity JKL designates changes in cash flows related to the forecasted transaction attributable to all changes in the purchase price as the hedged risk. It expects to sell finished products produced from the corn on May 31, 20X1. On February 3, 20X1, Entity JKL enters into 20 futures contracts, each for the purchase of 5,000 bushels of corn on May 20, 20X1 (100,000 in total), and designates those contracts as a hedging instrument in a cash flow hedge of the forecasted purchase of corn.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On February 3, 20X1, Entity JKL forecasts the purchase of 100,000 bushels of corn on May 20, 20X1. Entity JKL designates changes in cash flows related to the forecasted transaction attributable to all changes in the purchase price as the hedged risk. It expects to sell finished products produced from the corn on May 31, 20X1. On February 3, 20X1, Entity JKL enters into 20 futures contracts, each for the purchase of 5,000 bushels of corn on May 20, 20X1 (100,000 in total), and designates those contracts as a hedging instrument in a cash flow hedge of the forecasted purchase of corn. 815-30-55-42
Entity JKL chooses to assess effectiveness by comparing the entire change in fair value of the futures contracts to changes in the expected cash flows on the forecasted transaction. Entity JKL estimates its expected cash flows on the forecasted transaction based on the futures price of corn adjusted for the difference between the cost of corn delivered to Chicago and the cost of corn delivered to Minneapolis. Entity JKL does not choose to use a tailing strategy (as described in paragraph 815-20-25-121). Entity JKL expects changes in fair value of the futures contracts to be highly effective at offsetting changes in the expected cash outflows for the forecasted purchase of corn because both of the following conditions exist:
- aThe futures contracts are for the same variety and grade of corn that Entity JKL plans to purchase.
- bOn May 20, 20X1, the futures price for delivery on May 20, 20X1 will be equal to the spot price (because futures prices and spot prices converge as the delivery date approaches).
815-30-55-43
Entity JKL will purchase corn for delivery to its production facilities in Minneapolis, but the price of the futures contracts is based on delivery of corn to Chicago. Changes in the difference between the price of corn delivered to Chicago and the price of corn delivered to Minneapolis would result in not achieving perfect offset between the hedged item and hedging instrument and, if of significant magnitude, may preclude the hedging relationship from achieving highly effective offset.
815-30-55-44
On February 3, 20X1, the futures price of corn for delivery to Chicago on May 20, 20X1, is $2.6875 per bushel resulting in a total price of $268,750 for 100,000 bushels.
815-30-55-45
On May 1, 20X1, Entity JKL dedesignates the related futures contracts and closes them out by entering into offsetting contracts on the same exchange. As of that date, Entity JKL had recognized in accumulated other comprehensive income gains on the futures contracts of $26,250. Entity JKL still plans to purchase 100,000 bushels of corn on May 20, 20X1. Consequently, the gains that occurred before dedesignation will remain in other comprehensive income until the finished product is sold. If Entity JKL had not closed out the futures contracts when it dedesignated them, any further gains or losses would have been recognized in earnings.
815-30-55-46
On May 20, 20X1, Entity JKL purchases 100,000 bushels of corn, and on May 31, 20X1, Entity JKL sells the finished product.
815-30-55-47
The futures prices of corn that are in effect on key dates are assumed to be as follows.
Date "Futures Price per Bushel for Delivery to Chicago on May 20, 20X1" "Futures Price Adjusted for Delivery to Minneapolis on May 20, 20X1" "Inception of hedging relationship—February 3, 20X1" $2.6875 $2.7375 "End of quarter—March 31, 20X1" 3.1000 3.1500 "Discontinue hedge—May 1, 20X1" 2.9500 3.0000 "Purchase of corn—May 20, 20X1" 2.8500 2.9000
815-30-55-48
The changes in fair value of the futures contracts between inception (February 3, 20X1) and discontinuation (May 1, 20X1) of the hedge are as follows.
"February 3- March 31, 20X1" "April 1- May 1, 20X1" Futures price at beginning of period $2.6875 $3.1000 Futures price at end of period 3.1000 2.9500 Change in price per bushel 0.4125 (0.1500) "Bushels under contract (20 contracts @ 5,000 bushels each)" "× 100,000" "× 100,000" Change in fair value—gain (loss) " $41,250 " " $(15,000)"
815-30-55-49
The following table displays the entries to recognize the effects of all of the following:
- aEntering into futures contracts as a hedge of the forecasted purchase of corn
- bDedesignating and closing out the futures contracts
- cCompleting the forecasted purchase of corn
- dSelling the finished products produced from the corn.
Debit (Credit) Cash Inventory Other Comprehensive Income Earnings (a) "March 31, 20X1 (end of quarter)" Recognize change in fair value of futures contracts " $41,250 " " $(41,250)" "May 1, 20X1 (discontinue hedge)" Recognize change in fair value of futures contracts " (15,000)" " 15,000 " "May 20, 20X1" Recognize purchase of corn " (290,000)" " $290,000 " "May 31, 20X1" Recognize cost of sale of product " (290,000)" " $290,000 " Reclassify changes in fair value of futures contracts to earnings " 26,250 " " (26,250)" Total " $(263,750)" $- $- " $263,750 " (a) The change in the fair value of the hedging derivative is presented in the same income statement line item as the earnings effect of the hedged item.
815-30-55-50
To simplify this Example and focus on the effects of the hedging relationship, the margin account with the clearinghouse and certain amounts that would be involved in a sale of Entity JKL's inventory (for example, additional costs of production, selling costs, and sales revenue) have been ignored.
815-30-55-51
The effect of the hedging strategy is that the cost of the corn recognized in earnings when the finished product was sold was $263,750. If the hedging relationship had not been discontinued early, the cost recognized in earnings would have been $273,750, which was the futures price of the corn, adjusted for delivery to Minneapolis, at the inception of the hedge. Without the strategy, Entity JKL would have recognized $290,000, which was the price of corn delivered to Minneapolis at the time it was purchased.
815-30-55-52
The following Cases describe the effects on earnings and other comprehensive income of certain changes in a cash flow hedging relationship:
- aThe variability of the hedged interest payments is eliminated before the hedging derivative expires (Case A).
- bThe interest rate index that is the basis for the hedged interest payments is changed to a different index before the hedging derivative expires (Case B).
815-30-55-53
Cases A and B share the following assumptions. 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.
815-30-55-54
Entity MNO enters into an interest rate swap (Swap 1) and designates it as a hedge of the variable quarterly interest payments on Entity MNO's 5-year $5 million borrowing program, initially expected to be accomplished by a series of $5 million notes with 90-day terms. Entity MNO plans to continue issuing new 90-day notes over the next 5 years as each outstanding note matures. The interest on each note will be determined based on the contractually specified LIBOR rate at the time each note is issued. Swap 1 requires a settlement every 90 days, and the variable interest rate is reset immediately following each payment. Entity MNO pays a fixed rate of interest (6.5 percent) and receives interest at LIBOR. Entity MNO neither pays nor receives a premium at the inception of Swap 1. The notional amount of the contract is $5 million, and it expires in 5 years.
815-30-55-55
Because Swap 1 and the hedged forecasted interest payments are based on the same notional amount, have the same reset dates, and are based on the same contractually specified interest rate (that is, the LIBOR rate) designated under paragraph 815-20-25-15(j)(2), Entity MNO may conclude that the hedging relationship will perfectly offset changes in cash flows of the hedged item attributable to the hedged risk and the hedging instrument (absent a default by the interest rate swap counterparty).
815-30-55-56
This paragraph explains why the guidance in Example 4, Case B (see paragraph 815-20-55-97) does not conflict with the guidance in this Example. In the cash flow hedge in this Example, had the hedged forecasted transaction been narrowly limited to the interest payments on specific future debt issuances rather than on the five-year borrowing program, the failure to engage in future debt issuances would cause the related derivative instrument net gain or loss in other comprehensive income to be immediately reclassified into earnings pursuant to paragraphs because it would have been probable that the hedged forecasted transactions would not occur. Furthermore, if that failure is part of a pattern of hedged forecasted transactions being probable of not occurring, it would call into question both an entity's ability to accurately predict forecasted transactions and the propriety of using hedge accounting in the future for similar forecasted transactions, pursuant to paragraph 815-30-40-5. In contrast, in Example 4, Case B (see paragraph 815-20-55-97), the hedged quarterly interest payments were directly linked to Entity B's existing LIBOR-indexed floating-rate assets. When those existing assets are later prepaid or sold, the future quarterly interest payments on those specific assets are no longer probable of occurring (that is, no longer probable of being received by Entity B). Consequently, the hedging relationships for those future quarterly interest payments fail to meet the criterion in paragraph 815-20-25-15(b) and must be discontinued under paragraph 815-30-40-1. Because it is probable that the hedged quarterly interest payments that were directly linked to assets that were prepaid or sold will not occur, the related derivative instrument net gain or loss in other comprehensive income must be immediately reclassified into earnings pursuant to paragraphs .
815-30-55-57
At the end of the second year of the 5-year hedging relationship, Entity MNO discontinues its practice of issuing 90-day notes. Instead, Entity MNO issues a 3-year, $5 million note with a fixed rate of interest (7.25 percent). Because the interest rate on the three-year note is fixed, the variability of the future interest payments has been eliminated. Thus, Swap 1 no longer qualifies for cash flow hedge accounting. However, the net gain or loss on Swap 1 in accumulated other comprehensive income is not reclassified to earnings immediately. Immediate reclassification is required (and permitted) only if it becomes probable that the hedged transactions (future interest payments) will not occur. The variability of the payments has been eliminated, but it still is probable that they will occur. Thus, those gains or losses will continue to be reclassified from accumulated other comprehensive income to earnings as the interest payments affect earnings (as required by paragraphs ) and presented in the same income statement line item as the earnings effect of the hedged item. If the term of the fixed rate note had been longer than three years, the amounts in accumulated other comprehensive income still would have been reclassified into earnings over the next three years, which was the term of the designated hedging relationship.
815-30-55-58
Rather than liquidate the pay-fixed, receive-variable Swap 1, Entity MNO enters into a pay-floating, receive-fixed interest rate swap (Swap 2) with a 3-year term and a notional amount of $5 million. Entity MNO neither pays nor receives a premium. Like Swap 1, Swap 2 requires a settlement every 90 days and reprices immediately following each settlement. The relationship between 90-day interest rates and longer term rates has changed since Entity MNO entered into Swap 1 (that is, the shape of the yield curve is different). As a result, Swap 2 has different terms and its settlements do not exactly offset the settlements on Swap 1. Under the terms of Swap 2, Entity MNO will receive a fixed rate of 7.25 percent and pay interest at LIBOR.
815-30-55-59
The two swaps are not designated as hedging instruments and are reported at fair value. The changes in fair value are reported immediately in earnings and offset each other to a significant degree.
815-30-55-60
At the end of the second year of the 5-year hedging relationship, Entity MNO discontinues its practice of issuing 90-day notes and issues a 3-year, $5 million note with a different contractually specified interest rate (that is, an interest rate that is not LIBOR) that adjusts every 90 days. As of this date, Entity MNO must begin performing assessments of effectiveness for the hedging relationship by comparing changes in fair value of the hedging instrument (indexed to LIBOR) with changes in the value of the hedged item based on the revised contractually specified interest rate. Because the hedged forecasted transactions (future interest payments) are still probable of occurring, Entity MNO may continue to apply hedge accounting in accordance with paragraph 815-30-35-37A if the hedging instrument (indexed to LIBOR) is highly effective at achieving offsetting cash flows attributable to the revised contractually specified interest rate.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7At the end of the second year of the 5-year hedging relationship, Entity MNO discontinues its practice of issuing 90-day notes and issues a 3-year, $5 million note with a different contractually specified interest rate (that is, an interest rate that is not LIBOR) that adjusts every 90 days. As of this date, Entity MNO must begin performing assessments of effectiveness for the hedging relationship by comparing changes in fair value of the hedging instrument (indexed to LIBOR) with changes in the value of the hedged item based on the different contractually specified interest rate. Because the hedged forecasted transactions (future interest payments) are still probable of occurring, Entity MNO may continue to apply hedge accounting if the hedging instrument (indexed to LIBOR) is highly effective at achieving offsetting cash flows attributable to the different contractually specified interest rate. 815-30-55-61
If the revised hedging relationship is not determined to be highly effective, the hedging relationship must be discontinued. However, the net gain or loss on Swap 1 in accumulated other comprehensive income as of the date Entity MNO issues the three-year note is not reclassified into earnings immediately. Immediate reclassification would be required only if, as part of its normal process of assessing whether it remains probable that the hedged forecasted transaction will occur, Entity MNO determines that it is probable that the hedged transactions (future interest payments) will not occur. In this case, the expected amounts of those payments have changed (because they will be based on a revised contractually specified interest rate instead of LIBOR, as originally expected), but it still is probable that the payments will occur. Thus, those gains or losses will continue to be reclassified to earnings as the interest payments affect earnings and presented in the same income statement line item as the earnings effect of the hedged item.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7If the hedging relationship is not determined to be highly effective, the hedging relationship must be discontinued. However, the net gain or loss on Swap 1 in accumulated other comprehensive income as of the date Entity MNO issues the three-year note is not reclassified into earnings immediately. Immediate reclassification would be required only if, as part of its normal process of assessing whether it remains probable that the hedged forecasted transaction will occur, Entity MNO determines that it is probable that the hedged transactions (future interest payments) will not occur. In this case, the expected amounts of those payments have changed (because they will be based on a different contractually specified interest rate instead of LIBOR, as originally expected), but it still is probable that the payments will occur. Thus, those gains or losses will continue to be reclassified to earnings as the interest payments affect earnings and presented in the same income statement line item as the earnings effect of the hedged item. 815-30-55-63
This Example illustrates application of the accounting guidance for cash flow hedges described in paragraph 815-30-35-3. At the beginning of Period 1, Entity XYZ purchases for $9.25 an at-the-money call option on 1 unit of Commodity X with a strike price of $125.00 to hedge a forecasted purchase of 1 unit of that commodity projected to occur early in Period 5. Entity XYZ's documented policy is to assess hedge effectiveness by comparing changes in expected cash flows on the hedged transaction (based on changes in the Commodity X spot price) with changes in the option contract's intrinsic value. Because the hedging instrument is a purchased call option, its intrinsic value cannot be less than zero. If the price of the commodity is less than the option's strike price, the option is out-of-the-money. Its intrinsic value cannot decrease further regardless of how far the commodity price falls, and the intrinsic value will not increase until the commodity price increases to exceed the strike price. Thus, changes in cash flows from the option due to changes in its intrinsic value will offset changes in cash flows on the forecasted purchase only when the option is in the money or at the money. That phenomenon is demonstrated in Period 3 in the following table when the commodity price declines by $1.25. Because the commodity price is $.75 below the option's strike price, the option's intrinsic value declines by only $.50 (to zero). The effect reverses in Period 4 when the commodity index price increases by $6.50 and the option's intrinsic value increases by $5.75.
Period 1 Period 2 Period 3 Period 4 Assumptions Ending market price of Commodity X $127.25 $125.50 $124.25 $130.75 Ending fair value of option: Time value $7.50 $5.50 $3.00 $- Intrinsic value 2.25 0.50 - 5.75 Total $9.75 $6.00 $3.00 $5.75 Change in time value $(1.75) $(2.00) $(2.50) $(3.00) Change in intrinsic value 2.25 (1.75) (0.50) 5.75 Total current-period gain (loss) on derivative $0.50 $(3.75) $(3.00) $2.75 "Gain (loss) on derivative, adjusted to remove the component excluded from effectiveness test:" For the current period $2.25 $(1.75) $(0.50) $5.75 Cumulative 2.25 0.50 - 5.75 Change in expected future cash flows on hedged transaction: For the current period (2.25) 1.75 1.25 (6.50) Cumulative (2.25) (0.50) 0.75 (5.75)
815-30-55-64
The following are the entries required to account for the cash flow hedge. Note that consistent with paragraph 815-20-35-1(c), the change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is recorded in other comprehensive income for qualifying hedging relationships. For this type of hedging relationship, Entity XYZ elects to record changes in the option's time value excluded from the assessment of hedge effectiveness currently in earnings in accordance with paragraph 815-20-25-83B. Amounts recorded 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.
Debit (Credit) Period Description Derivative Earnings Other Comprehensive Income 1 Adjust derivative to fair value and other comprehensive income by the calculated amount $0.50 $1.75 $(2.25) 2 Adjust derivative to fair value and other comprehensive income by the calculated amount (3.75) 2.00 1.75 3 Adjust derivative to fair value and other comprehensive income by the calculated amount (3.00) 2.50 0.50 4 Adjust derivative to fair value and other comprehensive income by the calculated amount 2.75 3.00 (5.75)
815-30-55-66
The amount reflected in earnings relates to the component excluded from the effectiveness test, that is, the time value component. The change in cash flows from the hedged transaction was not fully offset in Period 3. However, as described in paragraph 815-20-25-76, a purchased call option is considered effective if it provides one-sided offset.
815-30-55-67
This Example illustrates the application of the guidance in Subtopic 815-20 and this Subtopic to a hedging relationship involving a single hedging derivative and three separate forecasted transactions. The three transactions occur on three separate dates, but the payment on receivables related to all three occurs on the same date. The settlement of the hedging derivative will occur on the date the receivable is paid. 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.
815-30-55-68
Entity DEF's functional currency is the U.S. dollar (USD). Entity ZYX's functional currency is the euro (EUR). Effective January 1, 20X1, Entity DEF enters into a royalty agreement with Entity ZYX that gives Entity ZYX the right to use Entity DEF's technology in manufacturing Product X. On April 30, 20X1, Entity ZYX will pay Entity DEF a royalty of EUR 1 million for each unit of Product X sold by that date. Entity DEF expects Entity ZYX to sell one unit of Product X on January 31, one on February 28, and one on March 31. The forecasted royalty is probable because Entity ZYX has identified a demand for Product X and no other supplier has the capacity to fill that demand.
815-30-55-69
Also on January 1, 20X1, Entity DEF enters into a forward contract to sell EUR 3 million on April 30, 20X1, for a price equal to the forward price of USD 0.6057 per EUR. Entity DEF designates the forward contract as a hedge of the risk of changes in its functional-currency-equivalent cash flows attributable to changes in the EUR-USD exchange rates related to the forecasted receipt of EUR 3 million from the royalty agreement. The spot price and forward price of EUR at January 1, 20X1, and the USD equivalent of EUR 3 million at those prices are assumed to be as follows.
"Prices at January 1, 20X1" USD per EUR "USD Equivalent of EUR 3 Million" Spot price USD 0.6019 USD " 1,805,700 " 4-month forward price 0.6057 " 1,817,100 "
815-30-55-70
Entity DEF will exclude from its assessment of effectiveness the portion of the fair value of the forward contract attributable to the spot-forward difference (the difference between the spot exchange rate and the forward exchange rate). Entity DEF elects to recognize changes in that portion of the derivative instrument's fair value currently in earnings in accordance with paragraph 815-20-25-83B. Entity DEF will estimate the cash flows on the forecasted transactions based on the current spot exchange rate and will discount that amount. Thus, Entity DEF will assess effectiveness by comparing the following amounts:
- aChanges in the fair value of the forward contract attributable to changes in the USD spot price of EUR
- bChanges in the present value of the forecasted cash flows based on the current spot exchange rate.
815-30-55-71
Those two changes will exactly offset because the currency and the notional amount of the forward contract match the currency and the total of the expected foreign currency amounts of the forecasted transactions. Thus, if Entity DEF dedesignates a proportion of the forward contract each time a royalty is recognized (as described in the following paragraph), the hedging relationship will meet the highly effective criterion.
815-30-55-72
As each royalty is recognized, Entity DEF recognizes a receivable and royalty income. The forecasted transaction (the recognition of royalty income) has occurred. The receivable is an asset, not a forecasted transaction, and would separately be eligible to be designated as a fair value hedge of foreign exchange risk or continue to be eligible as a cash flow hedge of foreign exchange risk. Consequently, if the variability of the functional currency cash flows related to the royalty receivable is not being hedged, Entity DEF will dedesignate a proportion of the hedging instrument in the original hedging relationship with respect to the proportion of the forward contract corresponding to the recognized royalty. As the royalty is recognized in earnings and each proportion of the derivative instrument is dedesignated, the related derivative instrument gain or loss in accumulated other comprehensive income is reclassified into earnings and presented in the same income statement line item as the earnings effect of the hedged item. After that date, any gain or loss on the dedesignated proportion of the derivative instrument and any transaction loss or gain on the royalty receivable will be recognized in earnings and may substantially offset each other.
815-30-55-73
Subtopic 830-20 requires immediate recognition in earnings of any foreign currency transaction gain or loss on a foreign-currency-denominated receivable that is not designated as a hedging instrument. Therefore, the effect of changes in spot prices on the royalty receivable must be recognized immediately in earnings.
815-30-55-74
The spot prices and forward prices for settlement on April 30, 20X1, in effect at inception of the hedge (January 1, 20X1) and at the end of each month between inception and April 30, 20X1, are assumed to be as follows.
USD per EUR Spot Price Forward Price for Settlement on 4/30/X1 January 1 USD 0.6019 USD 0.6057 January 31 0.5970 0.6000 February 28 0.5909 0.5926 March 31 0.5847 0.5855 April 30 0.5729 0.5729
815-30-55-75
The changes in fair value of the forward contract that are recognized each month in earnings and other comprehensive income are shown in the following table. Amounts reclassified from accumulated other comprehensive income to earnings and amounts excluded from the assessment of hedge effectiveness are presented in the same income statement line item as the earnings effect of the hedged item. The fair value of the forward is the present value of the difference between the USD to be received on the forward (USD 1,817,100) and the USD equivalent of EUR 3 million based on the current forward rate. A 6 percent discount rate is used in this Example.
Debit (Credit) Forward Contract Earnings Other Comprehensive Income Fair value on January 1 $- Period ended January 31: Change in spot-forward difference " 2,364 " " $(2,364)" Change in fair value of dedesignated proportion - - Change in fair value of designated proportion " 14,482 " " $(14,482)" Reclassification of gain - " (4,827)" " 4,827 " Fair value on January 31 " 16,846 " Period ended February 28: Change in spot-forward difference " 3,873 " " (3,873)" Change in fair value of dedesignated proportion " 6,063 " " (6,063)" Change in fair value of designated proportion " 12,127 " " (12,127)" Reclassification of gain - " (10,891)" " 10,891 " Fair value on February 28 " 38,909 " Period ended March 31: Change in spot-forward difference " 2,718 " " (2,718)" Change in fair value of dedesignated proportion " 12,448 " " (12,448)" Change in fair value of designated proportion " 6,223 " " (6,223)" Reclassification of gain - " (17,114)" " 17,114 " Fair value on March 31 " 60,298 " Period ended April 30: Change in spot-forward difference " 2,445 " " (2,445)" Change in fair value of dedesignated proportion " 35,657 " " (35,657)" Change in fair value of designated proportion - - Fair value on April 30 " $98,400 " Cumulative effect " $(98,400)" -
815-30-55-76
The effect on earnings of the royalty agreement and hedging relationship illustrated in this Example is summarized by month in the following table.
Amounts Recognized in Earnings Related to Receivable Forward Contract Period Ended USD Equivalent of EUR 1 Million Royalty Foreign Currency Transaction Gain (Loss) "Amount Attributable to the Dedesignated Proportion" Reclassifications from Other Comprehensive Income "Amount Attributable to the Difference between the Spot and Forward rates" "Total Amount Reported in Earnings" January 31 " $597,000 " $- $- " $4,827 " " $2,364 " " $604,191 " February 28 " 590,900 " " (6,100)" " 6,063 " " 10,891 " " 3,873 " " 605,627 " March 31 " 584,700 " " (12,400)" " 12,458 " " 17,104 " " 2,718 " " 604,580 " April 30 - " (35,400)" " 35,657 " - " 2,445 " " 2,702 " " $1,772,600 " " $(53,900)" " $54,178 " " $38,822 " " $11,400 " " $1,817,100 " " $98,400 "
815-30-55-77
This Example illustrates application of the guidance in this Subtopic to reporting cash flow hedges in comprehensive income and accumulated other comprehensive income. 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.
815-30-55-78
Entity TUV's cash flow hedge transactions through the end of 20X4 include all of the following:
- aIt continually purchases pork belly futures contracts to hedge its anticipated purchases of pork belly inventory.
- bIn 20X2, it entered into a Euro (EUR) forward exchange contract to hedge the foreign currency risk associated with the expected purchase of a pork belly processing machine with a five-year life that it bought from a vendor in Germany at the end of 20X2.
- cIn 20X2, it entered into a 10-year interest rate swap concurrent with the issuance of 10-year variable rate debt (cash flow hedge of future variable interest payments).
- dIn January 20X4, it entered into a two-year Swiss franc (CHF) forward exchange contract to hedge a forecasted export sale (denominated in CHF, expected to occur in December 20X5) of hot dogs to a large customer in Switzerland. In June 20X4, it closed the forward contract, but the forecasted transaction is still expected to occur.
815-30-55-79
The following table reconciles the beginning and ending accumulated other comprehensive income balances for 20X4. It supports the comprehensive income display and disclosures that are required under Topic 220. It is assumed that there are no other amounts in accumulated other comprehensive income. The after-tax amounts assume a 30 percent effective tax rate.
Other Comprehensive Income—Debit (Credit) Accumulated Other Comprehensive Income as of 1/1/X4 Changes in Fair Value Recognized in 20X4 Reclassification Adjustments Accumulated Other Comprehensive Income as of 12/31/X4 Derivatives designated as hedges of: Inventory purchases $230 $85 $(270) $45 Equipment purchase 120 (30) 90 Variable interest rate payments (40) 10 5 (25) Export sale - (50) - (50) Before-tax totals $310 $45 $(295) $60 After-tax totals $217 $32 $(207) $42
815-30-55-80
The following tables illustrate an acceptable method, under the provisions of Topic 220, of reporting the transactions described by this Example in earnings, comprehensive income, and shareholders' equity.
"Effect of Selected Items on Earnings and Comprehensive Income Year Ended December 31, 20X4" Debit (Credit) Effect on earnings before taxes: Cost of goods sold $270 Depreciation 30 Interest (5) Total 295 Income tax effect (88) (a) Effect on earnings after taxes $207 "Other comprehensive income, net of tax:" Cash flow hedges: "Net derivative losses, net of tax effect of $13" 32 "Reclassification adjustments, net of tax effect of $88" (207) Net change (175) Effect on total comprehensive income $32 (a) "This Example assumes that it is appropriate under the circumstances, in accordance with Topic 740, to recognize the related income tax benefit in the current year."
Effect of Selected Items on Shareholders' Equity "Year Ended December 31, 20X4 " Debit (Credit) Accumulated other comprehensive income: "Balance on December 31, 20X3" $217 Net change during the year related to cash flow hedges (175) "Balance on December 31, 20X4" $42
815-30-55-81
This Example illustrates the application of the guidance in Subtopic 815-20 and this Subtopic to accounting for a cash flow hedge of a fixed-rate foreign-currency-denominated debt in which all of the variability in the functional-currency-equivalent cash flows are eliminated by the effect of the hedge.
815-30-55-82
On July 1, 20X1, Entity DEF, a U.S. dollar (USD) functional currency entity, issues a zero-coupon debt instrument with a notional amount of FC 154,766.79 for FC 96,098.00. The interest rate implicit in the debt is 10 percent. The debt will mature on June 30, 20X6. Entity DEF enters into a forward contract to buy FC 154,766.79 in 5 years at the forward rate of 1.090148194 (USD 168,718.74) and designates the forward contract as a hedge of the variability of the USD functional currency equivalent cash flows on the debt. Because the currency, notional amount, and maturity of the debt and the forward contract match, the entity concludes that the hedging relationship will achieve perfect offset. The USD interest rate implicit in the forward contract is 11.028 percent. The market data, period end balances, and journal entries from cash flow hedge accounting are as follows.
Period Spot Rate USD/Functional Currency Forward Rate USD/Functional Currency Forward Rate Difference Foreign Currency Present Value USD Spot Amounts USD Debt (@11.028%) Fair Value Forward USD 0 1.040604383 1.090148194 0 " $96,098.00 " " $100,000.00 " " $100,000.00 " $- 1 1.1 1.184985966 0.094837771 " 105,707.80 " " 116,278.58 " " 111,028.04 " " 9,327.97 " 2 1.1 1.163142906 0.072994712 " 116,278.58 " " 127,906.44 " " 123,272.25 " " 8,041.09 " 3 1.1 1.141702484 0.051554290 " 127,906.44 " " 140,697.08 " " 136,866.76 " " 6,360.72 " 4 1.1 1.120657277 0.030509083 " 140,697.08 " " 154,766.79 " " 151,960.48 " " 4,215.89 " 5 1.1 1.1 0.009851806 " 154,766.79 "
Cash Forward Debt Other Comprehensive Income Interest Expense Transaction Loss 7/1/20X1 Borrow money " $100,000.00 " " $(100,000.00)" 6/30/20X2 Accrue interest on debt " (10,570.78)" " $10,570.78 " 6/30/20X2 Mark debt to spot " (5,707.80)" " $(5,707.80)" 6/30/20X2 Mark forward to fair value " $9,327.97 " " $(4,077.43)" 457.26 " (5,707.80)" 6/30/20X2 Balances " 100,000.00 " " 9,327.97 " " (116,278.58)" " (4,077.43)" " 11,028.04 " - 6/30/20X3 Accrue interest on debt " (11,627.86)" " 11,627.86 " 6/30/20X3 Mark forward to fair value " (1,286.88)" 670.53 616.35 6/30/20X3 Balances " 100,000.00 " " 8,041.08 " " (127,906.44)" " (3,406.90)" " 23,272.25 " 6/30/20X4 Accrue interest on debt " (12,790.64)" " 12,790.64 " - 6/30/20X4 Mark forward to fair value " (1,680.37)" 876.50 803.87 6/30/20X4 Balances " 100,000.00 " " 6,360.71 " " (140,697.08)" " (2,530.40)" " 36,866.76 " 6/30/20X5 Accrue interest on debt " (14,069.71)" " 14,069.71 " 6/30/20X5 Mark forward to fair value " (2,144.84)" " 1,120.83 " " 1,024.01 " 6/30/20X5 Balances " 100,000.00 " " 4,215.88 " " (154,766.79)" " (1,409.57)" " 51,960.48 " 6/30/20X6 Accrue interest on debt " (15,476.68)" " 15,476.68 " 6/30/20X6 Mark forward to fair value " (2,691.15)" " 1,409.57 " " 1,281.58 " 6/30/20X6 Balances " $100,000.00 " " $1,524.72 " " $(170,243.47)" $- " $68,718.74 " -
815-30-55-83
Following are journal entries at inception of the loan and at the end of the first year.
7/1/20X1 Debit Credit Cash " $100,000.00 " Functional currency debt at spot " $100,000.00 " To record FC borrowing in USD. 6/30/20X2 Debit Credit Interest expense " $10,570.78 " Debt " $10,570.78 " To accrue interest. Period end spot rate used for simplicity. Transaction loss " $5,707.80 " Debt " $5,707.80 " To record a transaction loss on the debt. Derivative asset " $9,327.97 " Other comprehensive Income " $9,327.97 " To record a derivative instrument at fair value and record the gain on the derivative in other comprehensive income. Other comprehensive income " $5,250.54 " Interest expense 457.26 Transaction gain/loss " $5,707.80 " To reclassify an amount out of accumulated other comprehensive income to do both of the following: a. To increase interest expense to the USD yield of 11.028 percent b. To offset the transaction loss on the debt.
815-30-55-84
Journal entries for the remaining four years are not displayed.
815-30-55-85
This Example would also be relevant for a non-interest-bearing foreign-currency-denominated receivable or payable instrument. An amount based on the rate implicit in the forward contract would be reported in earnings each period. Given the short maturities of many receivables and payables, the amount reported in earnings each period may be small.
815-30-55-86
This Example illustrates the application of paragraphs 815-20-25-30 and . This Example has the following assumptions:
- aParent A is a multinational corporation that has the U.S. dollar (USD) as its functional currency.
- bParent A has the following two subsidiaries:
- 1Subsidiary B, which has the Euro (EUR) as its functional currency
- 2Subsidiary C, which has the Japanese yen (JPY) as its functional currency.
- 1
- cSubsidiary B manufactures a product and has a forecasted sale of the product to Subsidiary C that will be transacted in JPY.
815-30-55-87
Eventually, Subsidiary C will sell the product to an unrelated third party in JPY. Subsidiary B enters into a forward contract with an unrelated third party to hedge the cash flow exposure of its forecasted intra-entity sale in JPY to changes in the EUR-JPY exchange rate.
815-30-55-88
The transaction in this Example meets the hedge criteria of paragraphs 815-20-25-30 and , which permits a derivative instrument to be designated as a hedge of the foreign currency exposure of variability in the functional-currency-equivalent cash flows associated with a forecasted intra-entity foreign-currency-denominated transaction if certain criteria are met. Specifically, the operating unit having the foreign currency exposure (Subsidiary B) is a party to the hedging instrument; the hedged transaction is denominated in JPY, which is a currency other than Subsidiary B's functional currency; and all other applicable criteria in Section 815-20-25 are satisfied.
815-30-55-89
Subsidiary B measures the derivative instrument at fair value and records the gain or loss on the derivative instrument in accumulated other comprehensive income. In the consolidated financial statements, the amount in other comprehensive income representing the gain or loss on a derivative instrument designated in a cash flow hedge of a forecasted foreign-currency-denominated intra-entity sale should be reclassified into earnings in the period that the revenue from the sale of the manufactured product to an unrelated third party is recognized and presented in earnings in the same income statement line item as the earnings effect of the hedged item. The reclassification into earnings in the consolidated financial statements should occur when the forecasted sale affects the earnings of Parent A. Because the consolidated earnings of Parent A will not be affected until the sale of the product by Subsidiary C to the unrelated third party occurs, the reclassification of the amount of derivative gain or loss from other comprehensive income into earnings in the consolidated financial statements should occur upon the sale by Subsidiary C to an unrelated third party.
815-30-55-90
This guidance is relevant only with respect to the consolidated financial statements. In Subsidiary B's separate entity financial statements, the reclassification of the amount of the derivative instrument gain or loss from other comprehensive income into earnings should occur in the period the forecasted intra-entity sale is recorded because Subsidiary B's earnings are affected by the change in the EUR-JPY exchange rate when the sale to Subsidiary C occurs.
815-30-55-91
This Example demonstrates the application of the change-in-variable-cash-flows method discussed in paragraph 815-30-35-16to assess hedge effectiveness.
815-30-55-92
An entity designates a receive-variable, pay-fixed interest rate swap with a zero fair value as a hedge of variable interest rate payments on a debt instrument. The variable leg of the interest rate swap is based on the three-month U.S. Treasury rate, and the variable cash flows of the debt are based on three-month LIBOR. Assume that the overall change in fair value of the interest rate swap from inception of the hedge is $16,300, the present value of the cumulative change in the cash flow on the variable leg of the interest rate swap is a gain (increased cash inflow) of $16,596, and the present value of the cumulative change in the expected future interest cash flows on the variable-rate liability due to changes in the cash flows expected for the remainder of the hedge term is a loss (increased cash outflow) of $16,396. (The cumulative changes in expected future cash flows on both the variable leg of the interest rate swap and the variable-rate debt are discounted using the rates applicable to determining the fair value of the derivative instrument.)
815-30-55-93A
The entity assesses effectiveness by comparing the present value of the cumulative change in the cash flow on the variable leg of the interest rate swap of $16,596 with the present value of the cumulative change in the expected future interest cash flows on the variable-rate liability of $16,396 and concludes that the hedging relationship is highly effective. As a result, the balance in accumulated other comprehensive income would reflect the cumulative change in the fair value of the swap since hedge inception ($16,300).
815-30-55-94
This Example illustrates the effect on accumulated other comprehensive income of issuing debt with a term that is shorter than originally forecasted.
815-30-55-95
Entity A expects to borrow $100 million over a 10-year period beginning in 6 months. Entity A initially plans to issue $100 million of 10-year fixed-rate debt at or near par at the then-current market interest rate; consequently, Entity A will be exposed to variability in cash flows in the future quarterly interest payments on the debt due to changes in credit risk and interest rate risk that occur during this 6-month period before issuance. To hedge the risk of changes in these 40 quarterly interest payments attributable to changes in the benchmark interest rate for the 6-month period, Entity A does all of the following:
- aIt enters into a derivative instrument (for example, a forward-starting interest rate swap).
- bIt documents that it is hedging the variability in the 40 future quarterly interest payments, attributable to changes in the benchmark interest rate, over the next 10 years related to its 10-year $100 million borrowing program that begins in 6 months.
- cIt documents that it will assess the effectiveness of the hedging relationship semimonthly on a quantitative basis.
815-30-55-96
Six months after inception of the hedging relationship, Entity A issues debt. However, due to market conditions, Entity A decides in the week before issuance that it will issue $100 million of fixed-rate debt with a 5-year maturity and quarterly interest payments.
815-30-55-97
When Entity A decides that the term of the debt to be issued will differ from the term of the debt originally expected to be issued, Entity A should not immediately reclassify into earnings the entire net gain or loss in accumulated other comprehensive income related to the derivative instrument. Instead, Entity A must first apply the requirements of paragraph 815-30-35-3 using its originally documented hedging strategy and the newly revised best estimate of the cash flows. That is, the assessment of hedge effectiveness should be based on the most recent best estimate of the hedged forecasted transaction as of the date that a cash flow hedge is discontinued prospectively.
815-30-55-98
Entity A's strategy is a cash flow hedge of 40 individual probable quarterly interest payments. A cash flow hedge of future interest payments is a hedge of a series of forecasted transactions; consequently, Entity A must first determine the likelihood of whether and when each forecasted transaction in the series will occur. If at any time during the hedging relationship Entity A determines that it is no longer probable that any of the forecasted transactions in the series will occur by the date (or within the time period) originally specified, it must terminate the original hedging relationship for each of those specific nonprobable forecasted transactions (even if the forecasted transaction will occur within an additional two-month period of time after that originally specified date).
815-30-55-98A
When Entity A performs its semimonthly assessment of effectiveness for the half-month period immediately preceding the issuance of the debt, it could also possibly conclude that the hedging relationship is no longer considered highly effective under paragraph 815-20-25-75 because the actual variability in the hedged interest payments for Years 1-5 is now based on the 5-year borrowing rate—not on 10-year rates as expected at the inception of the hedge when the entity selected the hedging derivative. In that circumstance, the hedging relationship is terminated. After the hedging relationship is terminated, Entity A must determine whether it is probable that any or all of those specific nonprobable forecasted transactions will not occur by the date (or within the time period) originally specified or within an additional two-month period of time thereafter (see paragraphs ).
815-30-55-99
When Entity A originally documented the hedging relationship, it was hedging 40 forecasted transactions (forecasted quarterly interest payments) that would begin in 6 months' time and continue over a 10-year period. In this Example, Entity A terminates the hedging relationship no later than on the date it issues the 5-year debt (because the variability of the first 20 hedged payments ceases on that date) and must determine the amount, if any, to be reclassified into earnings from accumulated other comprehensive income related to the net derivative gain or loss of the terminated cash flow hedge. Because Entity A issued a 5-year debt instrument, Entity A would determine that it is probable that the first 20 forecasted transactions would occur because they are now contractual obligations. Entity A must determine that it is not probable that any of the last 20 forecasted transactions will not occur to continue reporting the net derivative gain or loss related to these forecasted transactions in accumulated other comprehensive income. At issue is whether it is probable that the five-year debt will not be replaced by new borrowings that will involve the quarterly payment of interest. Provided that the entity determines that it is not probable that any of the original 40 forecasted transactions will not occur, Entity A must apply paragraph 815-30-35-3 and continue to report an amount in accumulated other comprehensive income based on the most recent best estimate of the hedged forecasted transactions related to all 40 forecasted transactions and reclassify an appropriate amount into earnings when each hedged forecasted transaction affects earnings and present those amounts in the same income statement line item as the earnings effect of the hedged item. If Entity A determines that it is probable that any of those forecasted transactions will not occur either by the end of the date (or within the time period) originally specified or within an additional two-month period of time thereafter (see paragraphs ), Entity A should reclassify into earnings from accumulated other comprehensive income the amount of the net derivative instrument gain or loss related to those specific nonoccurring forecasted transactions. That amount should be equivalent to the portion of the present value of the derivative instrument's cash flows intended to offset the changes in the original forecasted transactions for which Entity A has determined it is probable that they will not occur by the date (or within the time period) originally specified or within an additional two-month period of time thereafter. Thus, the nonoccurrence of one of the hedged forecasted transactions described in this Example could potentially jeopardize Entity A's ability to use cash flow hedge accounting in the future for the situation described.
815-30-55-100
The following Cases illustrate the application of paragraphs to changes in timing of a forecasted transaction in relation to an originally specified time period:
- aTransactions to occur within two months of end of originally specified time period (Case A)
- bTransactions not to occur within two months of end of originally specified time period (Case B).
815-30-55-101
On January 1, an entity enters into a hedge of the variability in the total cash flows of a forecasted sale of the first 100 units of a specified product during the 3-month period from February 1 to April 30. Gains and losses on the hedging instrument are accumulated in other comprehensive income and reclassified into earnings as sales occur and are presented in the same income statement line item as the earnings effect of the hedged item. However, as of March 10, only 60 units of the product have been sold and the entity determines that it is probable that the sale of the remaining 40 units will not occur by April 30. As a result, the entity must discontinue cash flow hedge accounting under the originally designated hedging relationship as of March 10 (pursuant to paragraph 815-30-40-1(a)).
815-30-55-102
In this Case, the entity determines that it is probable that the sale of the remaining 40 units will occur by June 20. Based on this new information, the entity is permitted to designate a new cash flow hedge under which subsequent derivative instrument gains and losses would receive cash flow hedge accounting. This Example focuses on the derivative instrument gains and losses that have been accumulated in other comprehensive income at March 10 with respect to the remaining 40 unsold units. The derivative instrument gains or losses accumulated in other comprehensive income related to the sale of the remaining 40 units should not be reclassified into earnings as of March 10 because the entity determined on that date that it is at least reasonably possible that the forecasted transactions will occur within the two-month period following April 30 (the end of the originally specified time period).
815-30-55-103
In this Case, the entity determined on March 10 that it is probable that the sale of the remaining 40 units will not occur by June 30 but it was reasonably possible that the sale would occur in July or August.
815-30-55-104
In that circumstance, the derivative instrument gains or losses accumulated in other comprehensive income related to the sale of the remaining 40 units must be reclassified into earnings as of March 10 because the entity would have determined on that date that it is probable that the forecasted transactions will neither occur by the end of the originally specified time period (that is, April 30) nor within the allowable additional two-month period of time (ending on June 30).
815-30-55-105
Furthermore, the example indicates no extenuating circumstances that could justify applying the exception related to a forecasted transaction that is probable of occurring on a date beyond the additional two-month period of time.
815-30-55-106
This Example illustrates the application of paragraphs 815-30-35-9 and , which permit an entity to designate a single cash flow hedge that encompasses the variability of functional-currency-equivalent cash flows attributable to foreign exchange risk related to the settlement of a foreign-currency-denominated receivable or payable resulting from a forecasted sale or purchase on credit.
815-30-55-107
- aEntity A, a U.S. dollar (USD) functional currency entity, forecasts the purchase of inventory on credit for FC 100,000 in 182 days with settlement of the payable in 227 days. The purchase will occur July 15 on credit; the resulting payable will settle August 29.
- bEntity A enters into a forward contract to purchase FC 100,000 in 227 days at the forward rate of USD .6614 = FC 1.
- cEntity A designates a single cash flow hedge that encompasses the variability of functional-currency-equivalent cash flows attributable to foreign exchange risk related to the settlement of the foreign-currency-denominated payable resulting from the forecasted purchase on credit.
- dAfter the initial quantitative effectiveness test, Entity A elects to assess effectiveness on a quantitative basis based on forward rates.
815-30-55-108
Exchange rates are as follows.
Period Spot 8/29 Forward 7/15 Forward 1/14 0.6575 0.6614 0.6605 3/31 0.6757 0.6793 6/30 0.6689 0.6734 7/15 0.6761 0.6767 8/29 0.6798 0.6798
815-30-55-109
Entity A would record the following journal entries.
Debit (Credit) Cash Inventory Forward Contract Accounts Payable Earnings Accum. Other Comprehensive Income Inception 1/14 — — — — — — March 31 entry (76 days): Mark forward to fair value " $1,703 " " $(1,703)" June 30 entry (91 days): Mark forward to fair value (526) 526 July 15 entries (15 days): Inventory purchase " $67,610 " " $(67,610)" August 29 entries (45 days): Mark forward to fair value 663 (663) Functional currency transaction loss on payable (370) $370 Adjustment for paragraph 815-30-35-3(d)—offset the functional currency transaction loss (370) 370 Adjustment for paragraph 815-30-35-3(d)—effect of hedge (based on implicit interest rate; see paragraph 815-30-55-112) 78 (78) Settlement of payable " $(67,980)" " 67,980 " Settlement of forward " 1,840 " " (1,840)" " $(66,140)" " $67,610 " $- $- $78 " $(1,548)"
815-30-55-110
Upon sale of the inventory, Entity A would record cost of goods sold of $67,610 and reclassify $1,548 from other comprehensive income to earnings to achieve a net cost of goods sold of $66,062. The effect of the hedge would result in a net cost to Entity A of $66,140 for the purchase of the inventory.
815-30-55-111
The amount of the adjustment under paragraph 815-30-35-3(d) is that amount needed to ensure that a net amount in earnings reflects the effect of the hedge through each reporting period up to and including the final settlement of the payable.
815-30-55-112
The amount of cost or income to be ascribed to each period is calculated as follows.
- Daily interest rate implicit in the hedging relationship as a result of the forward contract: $65,750 PV, $66,140 FV, 227n, i = 0.0026053%
1/14 " $65,750 " 3/31 " 65,880 " $130 6/30 " 66,036 " 156 7/15 " 66,062 " 26 8/29 " 66,140 " 78 $390
Method using two foreign currency forward exchange rates: From 1/14 to 7/15 "7/15 Forward Rate .6605 $66,050 - $65,750 =" $300 From 7/16 to 8/29 "8/29 Forward Rate .6614 $66,140 - $66,050 =" 90 $390 Pro rata method: From 1/14 to 7/15: $390 × 182/227 = $313 From 7/16 to 8/29: $390 × 45/227 = 77 $390
815-30-55-113
This Example illustrates the application of paragraphs , specifically, the mechanism for offsetting risks assumed by a Treasury Center using internal derivatives on a net basis with third-party contracts. This Example does not demonstrate the computation of fair values and as such makes certain simplifying assumptions.
815-30-55-114
Entity XYZ is a U.S. entity with the U.S. dollar (USD) as both its functional currency and its reporting currency. Entity XYZ has three subsidiaries: Subsidiary A is located in Germany and has the Euro (EUR) as its functional currency, Subsidiary B is located in Japan and has the Japanese yen (JPY) as its functional currency, and Subsidiary C is located in the United Kingdom and has the pound sterling (GBP) as its functional currency. Entity XYZ uses its Treasury Center to manage foreign exchange risk on a centralized basis. Foreign exchange risk assumed by Subsidiaries A, B, and C through transactions with external third parties is transferred to the Treasury Center via internal contracts. The Treasury Center then offsets that exposure to foreign currency risk via third-party contracts. To the extent possible, the Treasury Center offsets exposure to each individual currency on a net basis with third-party contracts.
815-30-55-115
On January 1, Subsidiaries A, B, and C decide that various foreign-currency-denominated forecasted transactions with external third parties for purchases and sales of various goods are probable. Also on January 1, Subsidiaries A, B, and C enter into internal foreign currency forward contracts with the Treasury Center to hedge the foreign exchange risk of those transactions with respect to their individual functional currencies. The Treasury Center has the same functional currency as the parent entity (USD).
815-30-55-116
Subsidiaries A, B, and C have the following foreign currency exposures and enter into the following internal contracts with the Treasury Center.
"Internal Contracts with Treasury Center" Subsidiary Functional Currency "Forecasted Exposures" Expected Transaction Date Currency Received Currency Paid A (German) EUR "JPY payable 12,000" Jun 1 "JPY 12,000" EUR 115 (a) GBP receivable 50 Jun 1 EUR 80 (a) GBP 50 B (Japanese) JPY USD payable 100 Jun 15 USD 100 "JPY 10,160 (a) " EUR receivable 100 Jun 15 "JPY 10,432 (a)" EUR 100 C (UK) GBP USD receivable 330 Jun 30 GBP 201 (a) USD 330 (a) Computed based on forward exchange rates as of January 1.
815-30-55-117
Subsidiaries A, B, and C designate the internal contracts with the Treasury Center as cash flow hedges of their foreign currency forecasted purchases and sales. Those internal contracts may be designated as hedging instruments in the consolidated financial statements if the requirements of this Subtopic are met. From the subsidiaries' perspectives, the requirements of paragraph 815-20-25-61 for foreign currency cash flow hedge accounting are satisfied as follows:
- aFrom the perspective of the hedging affiliate, the hedging relationship must meet the requirements of paragraphs 815-20-25-30 and for cash flow hedge accounting. Subsidiaries A, B, and C meet those requirements. In each hedging relationship, the forecasted transaction being hedged is denominated in a currency other than the subsidiary's functional currency, and the individual subsidiary that has the foreign currency exposure relative to its functional currency is a party to the hedging instrument. In addition, the criteria in Section 815-20-25 are met. Specifically, each subsidiary prepares formal documentation of the hedging relationships, including the date on which the forecasted transactions are expected to occur and the amount of foreign currency being hedged. The forecasted transactions being hedged are specifically identified, are probable of occurring, and are transactions with external third parties that create cash flow exposure that would affect reported earnings. Each subsidiary also documents its expectation of high effectiveness based on the internal derivatives designated as hedging instruments.
- bThe affiliate that issues the hedge must offset the internal derivative either individually or on a net basis. The Treasury Center determines that it will offset the exposure arising from the internal derivatives with Subsidiaries A, B, and C on a net basis with third-party contracts. Each currency for which a net exposure exists at the Treasury Center is offset by a third-party contract based on that currency.
815-30-55-118
To determine the net currency exposure arising from the internal contracts with Subsidiaries A, B, and C, the Treasury Center performs the following analysis.
Subsidiary Perspective—Internal Contracts with the Treasury Center Contract with Treasure Center Currency Received (Currency Paid) Subsidiary EUR JPY GBP USD A (German) Internal Contract 1 (115) " 12,000 " Internal Contract 2 80 (50) B (Japanese) Internal Contract 3 " (10,160)" 100 Internal Contract 4 (100) " 10,432 " C (UK) Internal Contract 5 201 (330) Net exposure (135) " 12,272 " 151 (230)
Treasury Center Perspective—Internal Contracts with the Subsidiaries Contract with Treasury Center Currency Received (Currency Paid) Subsidiary EUR JPY GBP USD A (German) Internal Contract 1 115 " (12,000)" Internal Contract 2 (80) 50 B (Japanese) Internal Contract 3 " 10,160 " (100) Internal Contract 4 100 " (10,432)" C (UK) Internal Contract 5 (201) 330 Net exposure 135 " (12,272)" (151) 230
815-30-55-119
For Subsidiaries A, B, and C to designate the internal contracts as hedging instruments in the consolidated financial statements, the Treasury Center must meet certain required criteria outlined in paragraphs in determining how it will offset exposure arising from multiple internal derivatives that it has issued. Based on a determination that those requirements are satisfied (see the following paragraph, the Treasury Center determines the net exposure in each currency with respect to USD (its functional currency). The Treasury Center determines that it will enter into the following three third-party foreign currency forward contracts. The Treasury Center enters into the contracts on January 1. The contracts mature on June 30.
Treasury Center's Contracts with Unrelated Third Parties Currency Bought (Currency Sold) EUR JPY BP USD Third-Party Contract 1 (135) 138 (a) Third-Party Contract 2 " 12,272 " (121) (a) Third-Party Contract 3 151 (247) (a) Net exposure (135) " 12,272 " 151 (230) (a) Computed based on forward exchange rates as of January 1.
815-30-55-120
From the Treasury Center's perspective, the required criteria in paragraphs are satisfied as follows:
- aThe issuing affiliate enters into a derivative instrument with an unrelated third party to offset, on a net basis for each foreign currency, the foreign exchange risk arising from multiple internal derivatives, and the derivative instrument with the unrelated third party generates equal or closely approximating gains and losses when compared with the aggregate or net losses and gains generated by the derivative instruments issued to affiliates. The Treasury Center enters into third-party derivative instruments to offset the exposure of each foreign currency on a net basis. The Treasury Center offsets 100 percent of the net exposure to each currency; that is, the Treasury Center does not selectively keep any portion of that exposure. In this Example, the Treasury Center's third-party contracts generate losses that are equal to the losses on internal contracts designated as hedging instruments by Subsidiaries A, B, and C (see analysis beginning in the following paragraph).
- bInternal derivatives that are not designated as hedging instruments and all nonderivative instruments are excluded from the determination of the foreign currency exposure on a net basis that is offset by the third-party derivative instrument. The Treasury Center does not include in the determination of net exposure any internal derivatives not designated as hedging instruments or any nonderivative instruments.
- cForeign currency exposure that is offset by a single net third-party contract arises from internal derivatives that involve the same currency and that mature within the same 31-day period. The offsetting net third-party derivative instrument related to that group of contracts must offset the aggregate or net exposure to that currency, must mature within the same 31-day period, and must be entered into within 3 business days after the designation of the internal derivatives as hedging instruments. The Treasury Center's third-party net contracts involve the same currency (that is, not a tandem currency) as the net exposure arising from the internal derivatives issued to Subsidiaries A, B, and C. The Treasury Center's third-party derivative instruments mature within the same 31-day period as the internal contracts that involve currencies that are offset on a net basis. In this Example, for simplicity, all internal contracts and third-party derivative instruments are entered into on the same date.
- dThe issuing affiliate tracks the exposure that it acquires from each hedging affiliate and maintains documentation supporting linkage of each derivative instrument and the offsetting aggregate or net derivative instrument with an unrelated third party. The Treasury Center maintains documentation supporting linkage of third-party contracts and internal contracts throughout the hedge period.
- eThe issuing affiliate does not alter or terminate the offsetting derivative instrument with an unrelated third party unless the hedging affiliate initiates that action. If the issuing affiliate does alter or terminate the offsetting third-party derivative (which should be rare), the hedging affiliate must prospectively cease hedge accounting for the internal derivatives that are offset by that third-party derivative. Based on Entity XYZ's policy, the Treasury Center may not alter or terminate the offsetting derivative instrument with an unrelated third party unless the hedging affiliate initiates that action.
- fIf an internal derivative that is included in determining the foreign currency exposure on a net basis is modified or dedesignated as a hedging instrument, compliance must be reassessed. For simplicity, this Example does not involve a modification or dedesignation of an internal derivative.
815-30-55-121
At the end of the quarter, each subsidiary determines the functional currency gains and losses for each contract with the Treasury Center.
Subsidiary Contract with Treasury Center Beginning of Period Functional Currency Amount Receive (Pay) (a) "End of Period Functional Currency Amount Receive (Pay) (a)" "Functional Currency Gain (Loss) (b)" "US Dollar Gain (Loss) (c)" A (German) Internal Contract 1 (115) (115) - - Internal Contract 2 80 83 (3) (3) B (Japanese) Internal Contract 3 " (10,160)" " (10,738)" 578 5 Internal Contract 4 " 10,432 " " 10,421 " 11 - C (UK) Internal Contract 5 201 204 (3) (5) Net USD Gain (Loss) (3) (a) Computed based on forward exchange rates as of January 1 and March 31. (b) "For simplicity, functional currency gains or losses are not discounted in this Example." (c) Functional currency gains and losses converted to USD based on current spot rates.
815-30-55-122
At the end of the quarter, the Treasury Center determines its gains or losses on third-party contracts.
Contracts with Third Parties Beginning of Period USD Amount Receive (Pay) (a) End of Period USD Amount Receive (Pay) (a) "USD Gain (Loss) (b)" Third-Party Contract 1 138 131 7 Third-Party Contract 2 (121) (114) (7) Third-Party Contract 3 (247) (244) (3) Net USD Gain (Loss) (3) (a) Computed based on forward exchange rates as of January 1 and March 31. (b) "For simplicity, gains or losses are not discounted in this Example."
815-30-55-123
Journal Entries at March 31 (Note: All journal entries are in USD.)
Subsidiaries' Journal Entries German Subsidiary A There is no entry for Contract 1 because the USD gain or loss is zero. Other comprehensive income $3 Derivative liability $3 To record the loss on Internal Contract 2. Japanese Subsidiary B Derivative asset $5 Other comprehensive income $5 To record the gain on Contract 3. There is no entry for Internal Contract 4 because the USD gain or loss is zero. UK Subsidiary C Other comprehensive income $5 Derivative liability $5 To record the loss on Internal Contract 5. Treasury Center's Journal Entries Journal Entries for Internal Contracts with Subsidiaries There is no entry for Internal Contract 1 because the USD gain or loss is zero. Derivative asset $3 Earnings $3 To record the gain on Internal Contract 2 with German Subsidiary A. Earnings 5 Derivative liability 5 To record the loss on Internal Contract 3 with Japanese Subsidiary B. There is no entry for Internal Contract 4 because the USD gain or loss is zero. Derivative asset 5 Earnings 5 To record the gain on Internal Contract 5 with UK Subsidiary C. Journal Entries for Third-Party Contracts Derivative asset $7 Earnings $7 To record the gain on Third-Party Contract 1. Earnings 7 Derivative liability 7 To record the loss on Third-Party Contract 2. Earnings 3 Derivative liability 3 To record the loss on Third-Party Contract 3. Results in Consolidation Derivative asset $7 Other comprehensive income 3 Derivative liability $10
815-30-55-124
In consolidation, the amounts in the balance sheets of Subsidiaries A, B, and C reflecting derivative instrument assets and derivative instrument liabilities arising from internal derivatives acquired from the Treasury Center eliminate against the Treasury Center's derivative instrument liabilities and derivative instrument assets arising from internal derivatives issued to the subsidiaries. The amount reflected in consolidated other comprehensive income reflects the net entry to other comprehensive income of Subsidiaries A, B, and C. The Treasury Center's gross derivative instrument asset and gross derivative instrument liability arising from third-party contracts are also reflected in the consolidated balance sheet. Based on the assumptions in this Example, the Treasury Center's net loss on third-party derivative instruments used to offset the exposure, on a net basis, of internal contracts with Subsidiaries A, B, and C equals the net loss on internal contracts with the subsidiaries. Therefore, within the Treasury Center, the gains on internal contracts issued to Subsidiaries A, B, and C, and the losses on third-party contracts are equal and offsetting. If the Treasury Center's net gain or loss on third-party contracts does not equal the net gain or loss on internal derivatives designated as hedging instruments by affiliates, the difference must be recognized in consolidated other comprehensive income.
815-30-55-125
The reclassification of amounts out of consolidated other comprehensive income is based on Subsidiaries A, B, and C's internal contracts with the Treasury Center. That is, the reclassification of amounts out of consolidated other comprehensive income into earnings is based on the timing and amounts of the individual subsidiaries' forecasted transactions. In this Example, at June 30, the forecasted transactions at Subsidiaries A, B, and C have been consummated and the net debit amount in consolidated other comprehensive income of 3 has been reversed.
815-30-55-126
This Example illustrates when the hedging instrument's gain or loss that is reported in accumulated other comprehensive income should be reclassified out of accumulated other comprehensive income into earnings under paragraph 815-30-35-36.
815-30-55-127
An entity forecasts that 1 year later it will purchase 1,000 ounces of gold at then current market prices for use in its operations. The entity wishes to protect itself against increases in the cost of gold above the current market price of $275 per ounce. The entity purchases a 1-year cash-settled at-the-money gold option on 1,000 ounces of gold, paying a premium of $10,000. If the price of gold is above $275 at the maturity (settlement) date, the counterparty will pay the entity 1,000 times the difference. If the price of gold is $275 or below at the maturity date, the contract expires worthless. The option cannot be exercised before its contractual maturity date. The entity designates the purchased option contract as a hedge of the variability in the purchase price (cash outflow) of the 1,000 ounces of gold for prices above $275 per ounce. The entity would reclassify the purchased option's gain or loss that is reported in accumulated other comprehensive income in earnings when the cost of the gold affects earnings (such as being included in cost of goods sold) and present that gain or loss in the same income statement line item as the earnings effect of the hedged item.
815-30-55-128
The following Cases illustrate the application of paragraph 815-30-40-5 in determining whether an entity should immediately reclassify into earnings the entire net gain or loss related to the derivative instrument in accumulated other comprehensive income when issuing debt at a date that is not the same as originally forecasted:
- aAmounts are not reclassified immediately into earnings (Case A).
- bAmounts are reclassified immediately into earnings (Case B).
815-30-55-129
- aEntity A expects to borrow $100 million over a 10-year period beginning in 6 months.
- bEntity A initially plans to issue $100 million of 10-year fixed-rate debt at or near par at the then-current market interest rate.
- cEntity A will be exposed to variability in cash flows for the future quarterly interest payments on the debt due to changes in credit risk and interest rate risk that occur during this six-month period before issuance.
- dTo hedge the risk of changes in these 40 quarterly interest payments attributable to changes in the benchmark interest rate for the 6-month period, Entity A does both of the following:
- 1Enters into a derivative instrument (for example, a forward-starting interest rate swap)
- 2Documents that it is hedging the variability in the 40 future quarterly interest payments, attributable to changes in the benchmark interest rate, over the next 10 years related to its 10-year $100 million borrowing program that begins in 6 months.
- 1
- eEntity A documents that it will assess the effectiveness of the hedging relationship semimonthly on a quantitative basis.
- fSix months after inception of the hedging relationship, Entity A decides to delay the issuance of the 10-year debt for 3 months.
815-30-55-130
When Entity A decides to delay the issuance of the 10-year debt for 3 months, Entity A should not immediately reclassify into earnings the entire net gain or loss in accumulated other comprehensive income related to the derivative instrument. Entity A's strategy is a cash flow hedge of 40 individual probable quarterly interest payments. A cash flow hedge of future interest payments is a hedge of a series of forecasted transactions; consequently, Entity A must first determine the likelihood of whether and when each forecasted transaction in the series will occur. If at any time during the hedging relationship Entity A determines that it is no longer probable that any of the forecasted transactions in the series will occur by the date (or within the time period) originally specified, it must terminate the original hedging relationship for each of those specific nonprobable forecasted transactions—even if the forecasted transaction will occur within an additional two-month period of time after that originally specified date. Entity A need not terminate the original hedging relationship for those specific forecasted transactions that remain probable of occurring by the date or within the time period originally specified. After the hedging relationship is terminated, Entity A must determine whether it is probable that any or all of those specific nonprobable forecasted transactions will not occur either by the date (or within the time period) originally specified or within an additional two-month period of time thereafter (see paragraphs ). Entity A should reclassify into earnings from accumulated other comprehensive income the amount of the net derivative instrument gain or loss related to those specific nonprobable forecasted transactions for which it is probable they will not occur. That amount should be equivalent to the present value of the derivative instrument's cash flows intended to offset the changes in the original forecasted transactions for which Entity A has determined it is probable that they will not occur by the date (or within the time period) originally specified or within an additional two-month period of time thereafter.
815-30-55-131
In this Case, when Entity A originally documented the hedging relationship, it was hedging 40 forecasted transactions (forecasted interest payments) that would begin in 6 months' time and continue over a 10-year period. Because Entity A did not issue the debt instrument as originally documented, Entity A would determine that it is probable that the first forecasted transaction will not occur at the time forecasted; consequently, Entity A must terminate the original hedging relationship with respect to that first forecasted transaction. However, Entity A would also determine that it is probable that the other 39 forecasted transactions will occur at the time forecasted. After the hedging relationship is terminated for the specific nonprobable first forecasted transaction, Entity A must determine whether it is probable that specific nonprobable first forecasted transaction will not occur by the forecasted date or within an additional two-month period of time thereafter. In this Case, Entity A determines that it is probable that the first hedged quarterly interest payment will not occur within two months of its specified date. The amount reclassified into earnings from accumulated other comprehensive income is the portion of the interest rate swap's net gain or loss equivalent to the present value of the cash flows from the interest rate swap intended to offset the changes in the first forecasted transaction that is probable not to occur.
815-30-55-132
This Case has the following assumptions:
- aEntity B expects to issue $100 million of 10-year, 9 percent debt in 6 months.
- bBecause the debt will have a fixed interest rate of 9 percent, Entity B will not be exposed to variability in the future quarterly interest payments at 9 percent, but it will be exposed to variability in the cash flows received as proceeds on the debt due to changes in credit risk and interest rate risk that occur during the 6-month period before issuance.
- cTo hedge the risk of changes in the total proceeds attributable to changes in the benchmark interest rate, Entity B does both of the following:
- 1Enters into a derivative instrument (for example, a short position in U.S. Treasury note futures contracts)
- 2Documents that it is hedging the variability in the cash proceeds attributable to changes in the benchmark interest rate to be received from the 9 percent fixed-rate debt it will issue in 6 months and that it will assess effectiveness on a quantitative basis.
- 1
- dBecause Entity B plans to issue $100 million of 10-year, 9 percent debt regardless of the then-current interest rate environment, the effect of increases or decreases in interest rates will be reflected in issuing the debt at a discount or a premium, respectively.
- eSix months after inception of the hedging relationship, Entity B decides to delay the issuance of the debt for three months.
815-30-55-133
This strategy is a cash flow hedge of the variability in proceeds attributable to changes in the benchmark interest rate to be received from the issuance of debt in six months. A cash flow hedge of the proceeds attributable to changes in the benchmark interest rate is a hedge of a single forecasted transaction specified to occur in six months; consequently, when the single forecasted transaction is no longer probable of occurring by the date (or within the time period) originally specified, Entity B must terminate the hedging relationship. After the hedging relationship is terminated, Entity B must determine whether it is probable that the specific nonprobable forecasted transaction will not occur by the date (or within the time period) originally specified or within an additional two-month period of time thereafter. Because Entity B decided to delay the issuance of the debt for a three-month period of time, Entity B concludes that it is probable that the forecasted transaction will not occur by the date (or within the time period) originally specified or within an additional two-month period of time thereafter. Consequently, Entity B should immediately reclassify into earnings the entire net gain or loss related to the derivative instrument in accumulated other comprehensive income. Given the guidance in paragraph 815-30-40-5, the nonoccurrence of the hedged forecasted transactions described in this Case could potentially jeopardize Entity B's ability to use cash flow hedge accounting in the future for the situation described.
815-30-55-134
This Example illustrates the application of the guidance in Subtopic 815-20 and this Subtopic for assessing effectiveness for a cash flow hedge of a forecasted purchase of inventory with a forward contract for which the hedged risk is variability in cash flows attributable to changes in an explicitly referenced variable component of the purchase price of the inventory. Assume the entity elects to perform subsequent assessments of hedge effectiveness on a quantitative basis using a cumulative-dollar-offset approach and all hedge documentation requirements were satisfied at inception.
This Example illustrates the application of the guidance in Subtopic 815-20 and this Subtopic for assessing effectiveness for a cash flow hedge of a forecasted purchase of inventory with a forward contract for which the hedged risk is variability in cash flows attributable to changes in a contractually specified component. Assume the entity elects to perform subsequent assessments of hedge effectiveness on a quantitative basis using a cumulative-dollar-offset approach and all hedge documentation requirements were satisfied at inception.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7| Editor's Note: Paragraph 815-30-55-134 will be amended upon transition, together with its heading: |
| • > Example 22: Assessing Effectiveness of a Cash Flow Hedge of a Forecasted Purchase of Inventory with a Forward Contract |
815-30-55-135
Entity J manufactures keys for door locks on buildings and cars. The keys are cut from sheets of metal called key plates. Entity J primarily purchases its key plates from Supplier 1 as needed. Supplier 1 and Entity J have an outstanding agreement specifying that the per-unit cost of each key plate will be determined by Supplier 1 on the first business day of each month on the basis of the following pricing formula:
- aSpot price of COMEX Zinc per pound × 0.2 pounds, plus
- bSpot price of COMEX Copper per pound × 0.1 pounds, plus
- cThe current cost of refining copper and zinc into key plates, plus
- dThe current cost of transporting the key plates to Entity J.
815-30-55-136
In January 20X1, Entity J expects to purchase 100,000 key plates in July 20X1, which requires 10,000 pounds of copper for the manufacturing process. Entity J decides that it wishes to hedge only the change in value of the price of COMEX Copper used to create the key plates being purchased in July 20X1.
815-30-55-137
On January 15, 20X1, Entity J enters into a forward contract maturing on July 1, 20X1 (that is, the date on which the price of copper used to manufacture the key plates is fixed) to purchase 10,000 pounds of COMEX Copper at $2.10 per pound. Any settlement amount on the forward contract will be based on the difference between the contract price of $2.10 per pound and the spot price of COMEX Copper on the maturity date (July 1, 20X1), multiplied by the notional amount of 10,000 pounds.
815-30-55-138
Entity J designates a cash flow hedge in which the hedging instrument is the forward contract, the hedged item is the forecasted purchase of key plates in July 20X1, and the hedged risk is the variability in the purchase price of the key plates attributable to changes in the COMEX Copper price index, which is a contractually specified component within the frame agreement. Entity J documents in its hedge documentation that the requirements to designate variability in cash flows attributable to changes in a contractually specified component as the hedged risk in paragraph 815-20-25-22A are met.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity J designates a cash flow hedge in which the hedging instrument is the forward contract, the hedged item is the forecasted purchase of key plates in July 20X1, and the hedged risk is the variability in the purchase price of the key plates attributable to changes in the COMEX Copper price index. Entity J determines that the COMEX Copper price index explicitly referenced in the agreement’s pricing formula is clearly and closely related (as described in paragraph 815-10-15-32(a) through (b)) to key plates and concludes that the conditions in paragraph 815-20-25-22C(b)(1) are met.815-30-55-139
Entity J bases its assessment of hedge effectiveness on cumulative changes in the fair value of the hedging instrument and the hedged item attributable to changes in the hedged risk.
815-30-55-140
In assessing hedge effectiveness on an ongoing basis, Entity J must consider the extent of offset between the change in expected cash flows on the hedging instrument (the copper forward contract) and the hedged item attributable to changes in the hedged risk (change in expected cash flows associated with forecasted purchases of key plates attributable to changes in the COMEX Copper price index). The table below illustrates the cumulative changes in the hedging instrument and hedged item attributable to changes in the hedged risk as of the first subsequent quarterly effectiveness assessment date.
Estimate of Change in Cash Flows Hedging Instrument Hedged Item Due to Fluctuation in Hedged Risk Forward price of copper (dollars per pound) "At hedge inception (Jan 15, 20X1)" $2.10 $2.10 "At first subsequent assessment date (March 31, 20X1)" $2.25 $2.25 Change in forward price of copper $0.15 $0.15 "Cumulative change in copper (per pound) × 10,000 pounds of copper" " $1,500.00 " " $1,500.00 "
815-30-55-141
Entity J could assess effectiveness as of March 31, 20X1, by comparing the $1,500 change in the hedging instrument with the $1,500 change in the hedged item attributable to changes in the hedged risk because the hedging instrument's maturity date and the date on which the price of copper will be fixed match (that is, July 1, 20X1).
815-30-55-142
This Example illustrates the application of the guidance in Subtopic 815-20 and this Subtopic to the designation of a cash flow hedge of a forecasted purchase of inventory in which the commodity exposure is managed centrally at the aggregate level. Assume the entity elects to perform subsequent assessments of hedge effectiveness on a qualitative basis and all hedge documentation requirements were satisfied at inception.
815-30-55-143
Entity Q is seeking to hedge the variability in cash flows associated with commodity price risk of its monthly plastic purchases for the next 12 months. It has two different manufacturing plant locations (Plant A and Plant B) that are purchasing five different grades of plastic from Supplier A. The plastic purchase price for each month is based on the month-end Joint Plastic (JP) index and a fixed basis differential component. The fixed basis differential offered by the supplier is determined by:
- aThe grade of the plastic purchased
- bThe distance between the plant location and supplier location.
815-30-55-144
At January 1, 20X1, Entity Q enters into a supply agreement with Supplier A to purchase plastic over the next 12 months. The respective agreements allow Entity Q to purchase the various grades of plastic at both of its plant locations as the need arises over the following year. The following table summarizes the pricing provisions contained in the supply agreement for each grade of plastic.
Grade 1 Grade 2 Grade 3 Grade 4 Grade 5 Plant A JP + $0.14 JP + $0.11 JP + $0.09 JP + $0.05 JP - $0.02 Plant B JP + $0.16 JP + $0.12 JP + $0.07 JP + $0.06 JP - $0.03
815-30-55-145
Entity Q's risk management objective is to hedge the variability in the purchase price of plastic attributable to changes in the JP index of the first 80,000 pounds of plastic purchased in each month regardless of grade or plant location delivered to. To accomplish this objective, Entity Q executes 12 separate forward contracts at January 1, 20X1, to purchase plastic as follows.
Settlement Date Notional Amount Underlying Index Jan forward "January 30, 20X1" "80,000 (lbs)" JP Feb forward "February 28, 20X1" "80,000 (lbs)" JP Mar forward "March 30, 20X1" "80,000 (lbs)" JP April forward "April 30, 20X1" "80,000 (lbs)" JP May forward "May 30, 20X1" "80,000 (lbs)" JP June forward "June 30, 20X1" "80,000 (lbs)" JP July forward "July 30, 20X1" "80,000 (lbs)" JP Aug forward "August 30, 20X1" "80,000 (lbs)" JP Sep forward "September 30, 20X1" "80,000 (lbs)" JP Oct forward "October 30, 20X1" "80,000 (lbs)" JP Nov forward "November 30, 20X1" "80,000 (lbs)" JP Dec forward "December 30, 20X1" "80,000 (lbs)" JP
815-30-55-146
Entity Q determines that the variable JP index referenced in the supply agreement constitutes a contractually specified component and that the requirements to designate variability in the cash flows attributable to changes in a contractually specified component as the hedged risk in paragraph 815-20-25-22A are met.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity Q designates the variability in cash flows attributable to changes in the JP index component as the hedged risk. Entity Q determines that the JP index explicitly referenced in the supply agreement is clearly and closely related (as described in paragraph 815-10-15-32(a) through (b)) to plastic and concludes that the conditions in paragraph 815-20-25-22C(b)(1) are met. 815-30-55-147
Because Entity Q determined that it will purchase at least 80,000 pounds of plastic each month in the coming 12 months to fulfill its expected manufacturing requirements, it documents that the hedged item (that is, the forecasted transaction within each month) is probable of occurring. Entity Q designates each forward contract as a cash flow hedge of the variability in cash flows attributable to changes in the contractually specified JP index on the first 80,000 pounds of plastic purchased (regardless of grade or plant location delivered to) for the appropriate month. The individual purchases of differing grades of plastic by Plant A and Plant B during each month share the risk exposure to the variability in the purchase price of the plastic attributable to changes in the contractually specified JP index. Therefore, the individual transactions in the hedged portfolio of plastic purchases for each month share the same risk exposure for which they are designated as being hedged in accordance with paragraph 815-20-25-15(a)(2).
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Because Entity Q determined that it will purchase at least 80,000 pounds of plastic each month in the coming 12 months to fulfill its expected manufacturing requirements, it documents that the hedged item (that is, the forecasted transaction within each month) is probable of occurring. Entity Q designates each forward contract as a cash flow hedge of the variability in cash flows attributable to changes in the explicitly referenced JP index on the first 80,000 pounds of plastic purchased (regardless of grade or plant location delivered to) for the appropriate month.815-30-55-148
In accordance with paragraph 815-20-25-3(b)(2)(iv)(01)(B), if Entity Q has determined the critical terms of the hedged item and hedging instrument match, it may elect to assess effectiveness qualitatively both at inception of the hedging relationship and on an ongoing basis on the basis of the following factors in accordance with paragraphs :
- aThe hedging instrument's underlying matches the index upon which plastic purchases will be determined (that is, the JP Index).
- bThe notional of the hedging instrument matches the forecasted quantity designated as the hedged item.
- cThe date on which the derivatives mature matches the timing in which the forecasted purchases are expected to be made. That is, the quantity of the hedged item, 80,000 pounds, is an aggregate amount expected to be purchased over the course of the respective month (that is, the same 31-day period) in which the derivative matures.
- dEach hedging instrument was traded with at-market terms (that is, it has an initial fair value of zero).
- eAssessment of effectiveness will be performed on the basis of the total change in the fair value of the hedging instrument.
- fAlthough the amount of plastic being hedged each period is a cumulative amount across multiple grades of plastic, the basis differentials between grades of plastic and location are not required to be included in assessments of effectiveness because Entity Q has designated the variability in cash flows attributable to changes in the JP index (the contractually specified component) as the hedged risk within its purchases of plastics.
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7In accordance with paragraph 815-20-25-3(b)(2)(iv)(01)(B), if Entity Q has determined that the critical terms of the hedged item and hedging instrument match, it may elect to assess effectiveness qualitatively both at inception of the hedging relationship and on an ongoing basis on the basis of the following factors in accordance with paragraphs :- aThe hedging instrument's underlying matches the index upon which plastic purchases will be determined (that is, the JP index).
- bThe notional of the hedging instrument matches the forecasted quantity designated as the hedged item.
- cThe date on which the derivatives mature matches the timing in which the forecasted purchases are expected to be made. That is, the quantity of the hedged item (80,000 pounds) is an aggregate amount expected to be purchased over the course of the respective month (that is, the same 31-day period) in which the derivative matures.
- dEach hedging instrument was traded with at-market terms (that is, it has an initial fair value of zero).
- eAssessment of effectiveness will be performed on the basis of the total change in the fair value of the hedging instrument.
- fAlthough the amount of plastic being hedged each period is a cumulative amount across multiple grades of plastic, the basis differentials between grades of plastic and location are not required to be included in assessments of effectiveness because Entity Q has designated the variability in cash flows attributable to changes in the JP index (the explicitly referenced variable component of the forecasted purchase price) as the hedged risk.
815-30-55-149
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7This Example illustrates the application of the guidance in paragraphs 815-20-25-15(e) and 815-20-25-22C to determine whether a price component is eligible to be designated as the hedged risk in a forecasted purchase of nonfinancial assets in which the associated forward contracts are accounted for as derivatives because physical settlement is not probable of occurring but it is probable that any shortfall will be purchased in the spot market. On January 1, 20X1, Entity R enters into forward contracts with multiple suppliers to purchase an aggregate 1,000 bushels of soybeans for delivery in June 20X1 to use in its operations. Each contract stipulates that the purchase price per bushel is equal to the ABC soybean index price (June maturity) plus a variable basis differential representing transportation costs. Furthermore, each contract permits net settlement of the contract if the quality of the soybeans delivered does not meet Entity R’s specifications. If that happens, Entity R will net settle the affected forward contracts and purchase soybeans of the appropriate specifications in the spot market to make up for any shortfall. Given a history of suppliers not delivering soybeans meeting the required specifications, Entity R cannot assert that any specific forward contract will be physically settled and, therefore, determines that the forward contracts do not qualify for the normal purchases and normal sales scope exception.815-30-55-150
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On January 1, 20X1, Entity R enters into a futures contract to fix the price of 1,000 bushels of ABC soybeans in accordance with its risk management objective. Entity R designates this futures contract as a hedge of the variability in cash flows attributable to changes in the ABC soybean index (a component of the price of soybeans) related to the first 1,000 bushels of soybeans forecasted to be purchased in June 20X1. The forecasted purchases include ABC soybeans purchased from suppliers in accordance with forward contracts and ABC soybeans purchased in the spot market.815-30-55-151
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity R determines that the ABC soybean index is an eligible hedged risk for the forecasted purchase of 1,000 bushels of ABC soybeans for delivery in June 20X1 either in the spot market or in accordance with the supplier contracts. To reach that conclusion, Entity R performs two distinct assessments. In accordance with paragraph 815-20-25-22C(a), Entity R determines that the ABC soybean index (that is, the hedged variable component) is clearly and closely related to the nonfinancial asset being purchased (that is, ABC soybeans in the pertinent spot market). In accordance with paragraph 815-20-25-22C(b)(1), Entity R determines that the ABC soybean index (that is, the hedged variable component) is explicitly referenced in the pricing formula of the supplier contracts and that the ABC soybean index is clearly and closely related to ABC soybeans purchased in accordance with the supplier contracts. Although Entity R is unable to assert that forward contracts with suppliers are probable of physical settlement, Entity R can assert that the forecasted transactions are probable of occurring through a combination of physically settled forward contracts and spot market transactions.815-30-55-152
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7This Example illustrates the application of the guidance in paragraph 815-20-25-22C to determine whether a subcomponent of a component that is explicitly referenced in an agreement can be designated as the hedged risk in a cash flow hedge of a forecasted purchase of a nonfinancial asset.815-30-55-153
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity X is a manufacturing company that uses copper wire (that is, copper that has been drawn down to size and processed for manufacturing purposes) in the normal course of business. On January 1, 20X1, Entity X enters into a supply agreement to purchase 1,000 pounds of copper wire for its manufacturing operations in each of the next 12 months. The supply agreement stipulates that the monthly purchase price per pound is equal to the ABC Copper Wire index price (maturing in month of delivery), plus other basis differentials. Entity X determines that the supply agreement meets the definition of a derivative in Topic 815.815-30-55-154
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity X is seeking to reduce its commodity price exposure to the forecasted purchase of 1,000 pounds of copper wire in each of the next 12 months. Derivatives referencing the ABC Copper Wire index are less liquid than derivatives referencing the core underlying ingredient in copper wire, which is raw copper. Entity X determines that the market for the ABC Copper Wire index is based on the price of raw copper plus processing costs, that it takes one pound of raw copper to produce one pound of copper wire, and that raw copper prices are based on COMEX Copper futures. Therefore, on January 1, 20X1, Entity X executes 12 futures contracts, each having a 1,000-pound notional amount tied to the COMEX Copper index futures price (maturing in successive months). Those derivatives are designated as hedging the risk of cash flow variability attributable to the COMEX Copper index (a subcomponent of the explicitly referenced ABC Copper Wire index) related to its forecasted purchase of the first 1,000 pounds of copper wire per month.815-30-55-155
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity X applies the normal purchases and normal sales scope exception in accordance with Subtopic 815-10 to the contract to purchase copper wire. Therefore, Entity X determines that the condition in paragraph 815-20-25-22C(b)(1) is met and the ABC Copper Wire index (the explicitly referenced component in the forward contract) is clearly and closely related (as described in paragraph 815-10-15-32(a) through (b)) to the forecasted transaction in accordance with paragraph 815-20-55-18D. In addition, Entity X determines that the COMEX Copper index is clearly and closely related (as described in paragraph 815-10-15-32(a) through (b)) to the explicitly referenced ABC Copper Wire index. Thus, Entity X determines that the COMEX Copper index is an eligible risk subcomponent in accordance with paragraph 815-20-25-22C(b)(2).815-30-55-156
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7This Example illustrates the application of the guidance in paragraph 815-20-25-22C to determine whether a price component in a forecasted purchase of a nonfinancial asset in the spot market is eligible to be designated as the hedged risk.815-30-55-157
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On December 31, 20X0, Entity C forecasts that it will purchase at least 20,000 MMBtus of natural gas in the spot market for production purposes in June 20X1. On January 1, 20X1, Entity C enters into a futures contract to fix the price of 20,000 MMBtus of natural gas that is tied to the XYZ National NatGas index (June 20X1 maturity) in accordance with its risk management objective. Entity C designates the futures contract as the hedging instrument in a cash flow hedge of the variability in cash flows attributable to the XYZ National NatGas index component related to its forecasted purchase of the first 20,000 MMBtus of natural gas in the spot market in June 20X1.815-30-55-158
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity C concludes that agreements to purchase natural gas in this region are frequently priced using one of the following formulas:- aABC Regional NatGas index price + Fixed Spread
- bXYZ National NatGas index price + Cost to Transport + Fixed Spread.
815-30-55-159
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity C determines that the XYZ National NatGas index component is clearly and closely related (as described in paragraph 815-10-15-32(a) through (b)) to the forecasted purchase of natural gas in the spot market in accordance with paragraph 815-20-25-22C(a). Because the price of natural gas being purchased by Entity C is not set forth in an agreement, the guidance in paragraph 815-20-25-22C(b) would not apply. If Entity C had chosen to designate the ABC Regional NatGas index as the hedged risk and determined that this index was clearly and closely related to the forecasted purchase of natural gas in the spot market, that also would be permissible under paragraph 815-20-25-22C(a).815-30-55-160
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7This Example illustrates the application of the guidance in paragraph 815-20-25-22C to determine whether multiple price components are eligible to be designated as the hedged risks in a group of forecasted purchases of nonfinancial assets when uncertainty exists about which component or components will be explicitly referenced in the pricing formulas of not-yet-existing contracts.815-30-55-161
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity Y’s objective is to hedge the variability in cash flows attributable to changes in the explicitly referenced component or components in not-yet-existing agreements to purchase 1,000 bushels of soybeans. On January 1, 20X1, Entity Y begins negotiations with multiple vendors to purchase 1,000 bushels of soybeans on June 30, 20X2. As of April 1, 20X1, the counterparties have not agreed on whether the pricing formula of the agreements will price the soybeans on the basis of the ABC Soybean index or the DEF Soybean index. Entity Y concludes that it is probable that 1,000 bushels of soybeans will be purchased and that the pricing formula in the agreements will reference any combination of the ABC Soybean index and the DEF Soybean index.815-30-55-162
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On April 1, 20X1, Entity Y enters into a futures contract for 1,000 bushels of ABC Soybeans maturing on June 30, 20X2. Entity Y designates that futures contract as a hedge of cash flow variability attributable to the designated hedged risk for the forecasted purchase of the first 1,000 bushels of soybeans purchased under agreements with a pricing formula that references any combination of the ABC Soybean index and the DEF Soybean index on June 30, 20X2. Because of the uncertainty of whether the not-yet-existing agreements’ pricing formulas will reference the ABC Soybean index or the DEF Soybean index, Entity Y designates both indexes as the hedged risks in the cash flow hedge.815-30-55-163
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7At hedge inception, Entity Y expects that the forecasted transactions will have multiple risks occurring at the same time (that is, the purchase agreements will reference a combination of the ABC Soybean index and the DEF Soybean index), but Entity Y is uncertain what combination of the ABC Soybean index and the DEF Soybean index will be explicitly referenced in the pricing formulas in the agreements. Entity Y determines that both the ABC Soybean index and the DEF Soybean index will be eligible components for designation in accordance with paragraph 815-20-25-22C(b) upon execution of the purchase agreements. Entity Y elects to assess whether the hedged risks in the group of individual forecasted transactions have similar risk exposure by assessing whether the designated hedging instrument is highly effective in achieving offsetting changes in cash flows attributable to each hedged risk in the group, on an individual basis, in accordance with paragraph 815-20-55-23A(a). That is, Entity Y assesses and determines that the hedging instrument is highly effective against both designated risks (ABC and DEF Soybean indexes) in the group. Entity Y uses that assessment as a “dual purpose” test to support that the forecasted transactions in the group are similar and that the hedging instrument is highly effective at achieving offsetting cash flows of the forecasted transactions, regardless of whether the ABC Soybean index or the DEF Soybean index is ultimately referenced in the not-yet-existing agreements’ pricing formulas.815-30-55-164
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On June 30, 20X1, Entity Y enters into forward contracts with multiple vendors. Each agreement includes a pricing formula referencing either the ABC Soybean index or the DEF Soybean index, with a June 30, 20X2 delivery date. The hedging relationship continues to be eligible for hedge accounting in accordance with paragraph 815-20-25-22C(b). Entity Y determines that the designated hedged risks (ABC and DEF Soybean indexes) in the group are similar because the hedging instrument is highly effective against both risks in the group in accordance with paragraph 815-20-55-23A(a). Therefore, Entity Y concludes that the relationship continues to be eligible for hedge accounting. 815-30-55-165
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7This Example illustrates the application of the guidance in paragraphs in which the designated hedged risk is the variability in cash flows attributable to changes in the contractually specified interest rate on a choose-your-rate debt instrument that is:- aYet to be issued
- bIssued and outstanding
- cReplaced during the hedge period.
815-30-55-166
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On January 1, 20X1, Entity A determines that it is probable it will enter into a choose-your-rate debt arrangement with a bank for a 5-year, $20 million variable-rate note payable to be issued on April 1, 20X1, with the principal due at maturity. On January 1, 20X1, Entity A determines that the interest rate indexes and interest rate tenors included in choose-your-rate debt being offered in the market are as follows:- a1-Month Term SOFR (paid every 30 days)
- b3-Month Term SOFR (paid every 90 days)
- c6-Month Term SOFR (paid every 6 months)
- d1-Month U.S. Treasury Rate (paid every 30 days)
- ePrime (paid every 30 days).
815-30-55-167
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity A seeks to hedge the cash flow variability attributable to changes in the contractually specified interest rate on this choose-your-rate debt instrument. Accordingly, on January 1, 20X1, Entity A enters into a forward-starting receive-variable, pay-fixed, 5-year, $20 million notional interest rate swap that requires settlement and resets every 30 days beginning after April 1, 20X1. Under the terms of the swap, Entity A receives variable payments every 30 days beginning after April 1, 20X1, based on the average of Daily SOFR over the past 30 days (that is, the variable-rate interest payments are indexed to 30-Day Average SOFR, in arrears) and pays a fixed rate of 5 percent. On January 1, 20X1, the fair value of the interest rate swap is zero.815-30-55-168
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On January 1, 20X1, Entity A designates the swap as hedging the variability in cash flows attributable to changes in the contractually specified interest rate on the 5-year, $20 million notional choose-your-rate debt instrument forecasted to begin accruing interest on April 1, 20X1, and any related replacement debt, in accordance with paragraph 815-30-35-37B. On January 1, 20X1, Entity A documents the interest rate indexes and interest rate tenors included in choose-your-rate debt being offered in the market (that is, those interest rate indexes and interest rate tenors included in paragraph 815-30-55-166(a) through (e)) in accordance with paragraph 815-30-35-37D. Only interest rate indexes and interest rate tenors are required to be documented in accordance with paragraph 815-30-35-37D (that is, payment conventions included in paragraph 815-30-55-166(a) through (e) are included only for illustrative purposes and do not depict an incremental documentation requirement). Entity A determines that it is probable that it will issue choose-your-rate debt and initially select one of those interest rate indexes and interest rate tenors when the choose-your-rate debt is issued on April 1, 20X1.815-30-55-169
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity A’s best estimate of the interest rate index and interest rate tenor that it will initially select for the first interest period when the choose-your-rate debt is issued is 1-Month Term SOFR. In accordance with paragraph 815-30-35-37C, Entity A designates that interest rate index and interest rate tenor as its contractually specified interest rate. Entity A performs an initial quantitative hedge effectiveness assessment on January 1, 20X1, based on this best estimate (that is, 60 monthly interest payments that begin to accrue on April 1, 20X1, based on 1-Month Term SOFR, with the rate resetting immediately following each payment due date) and concludes that the relationship is highly effective. In accordance with paragraph 815-20-25-79B, this effectiveness assessment does not consider the optionality expected to be embedded within the choose-your-rate debt instrument. That is, the terms used to estimate changes in the hedged forecasted cash flows for purposes of the hedge effectiveness assessment only consider Entity A’s best estimate of the interest rate index and interest rate tenor that it will select for the first interest period when the choose-your-rate debt is issued, which is 1-Month Term SOFR.815-30-55-170
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On April 1, 20X1, the note payable is issued. The note payable allows Entity A to pay interest at any of the following variable interest rates based on the rate that the entity selects at each reset date:- a1-Month Term SOFR (paid every 30 days)
- b3-Month Term SOFR (paid every 90 days)
- c6-Month Term SOFR (paid every 6 months)
- d1-Month U.S. Treasury Rate (paid every 30 days)
- ePrime (paid every 30 days)
- fEffective Federal Funds Rate (paid every 30 days).
815-30-55-171
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7In accordance with paragraphs , after the choose-your-rate debt is issued and Entity A chooses the first interest rate index and interest rate tenor upon which interest will accrue, the list of interest rates and interest rate tenors documented at hedge inception is replaced by the list of interest rates and interest rate tenors included in the issued choose-your-rate debt agreement for the purposes of determining whether hedge accounting can continue. After Entity A chooses the first interest rate index and interest rate tenor upon which interest will accrue, it updates its hedge documentation in accordance with paragraph 815-30-35-37J to indicate that it will choose to designate the contractually specified interest rate index and interest rate tenor as any interest rate index and interest rate tenor selected in the issued choose-your-rate debt, which would include the Effective Federal Funds Rate. In the future, if Entity A selects an alternative interest rate index or interest rate tenor on the choose-your-rate debt instrument, the designated contractually specified interest rate would be the interest rate index and interest rate tenor selected at that time. Similarly, if Entity A replaces the choose-your-rate debt instrument with a debt instrument for which the interest rate index and interest rate tenor match one of the interest rate index and interest rate tenor options included in the originally issued choose-your-rate debt instrument, interest payments on the replacement debt would continue to be considered the designated forecasted transactions.815-30-55-172
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7After the choose-your-rate debt is issued on April 1, 20X1, Entity A performs a prospective and retrospective hedge effectiveness assessment based on the then-selected interest rate index and interest rate tenor of the debt instrument. In accordance with paragraph 815-20-25-79B, this effectiveness assessment does not consider the optionality embedded within the choose-your-rate debt instrument. That is, the terms used to estimate changes in the hedged forecasted cash flows for purposes of the hedge effectiveness assessment only consider the currently selected interest rate index and interest rate tenor of 1-Month Term SOFR.815-30-55-173
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Subsequent elections to change the interest rate index and interest rate tenor on the choose-your-rate debt instrument or replacement debt instrument may affect ongoing hedge accounting for this relationship. Consider the following scenarios, each occurring on April 1, 20X4:- aEntity A changes the variable interest rate on the choose-your-rate debt instrument to 3-Month Term SOFR, payable every 90 days, with the rate resetting immediately following each payment (Scenario A).
- bEntity A changes the variable interest rate on the choose-your-rate debt instrument to Prime, payable every 30 days, with the rate resetting immediately following each payment (Scenario B).
- cEntity A replaces the choose-your-rate debt instrument with a 1-year, $30 million 3-Month Term SOFR note, payable every 90 days, with the rate resetting immediately following each payment, with the principal due at maturity (Scenario C).
- dEntity A replaces the choose-your-rate debt instrument with a 2-year, $20 million 12-Month Term SOFR note, payable annually, with the rate resetting immediately following each payment, with the principal due at maturity (Scenario D).
815-30-55-174
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On April 1, 20X4, Entity A elects to make future interest payments on the existing choose-your-rate debt instrument based on 3-Month Term SOFR. Consistent with Entity A’s hedge documentation, this election automatically changes the contractually specified interest rate in the hedging relationship from 1-Month Term SOFR to 3-Month Term SOFR. The resulting change in the number and frequency of hedged interest payments in the hedging relationship does not result in a mandatory hedge dedesignation or require that Entity A consider the guidance in paragraphs .815-30-55-175
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity A performs a final retrospective assessment of hedge effectiveness on the basis of changes in cash flows on 1-Month Term SOFR interest payments (payable every 30 days), assuming that the contractually specified interest rate will not change, and determines that the hedging relationship was highly effective through April 1, 20X4. Entity A then performs a prospective assessment of hedge effectiveness on the basis of changes in cash flows on 3-Month Term SOFR interest payments (payable every 90 days). When assessing hedge effectiveness with the new risk, Entity A creates the terms of the instrument used to estimate the changes in the cash flows of the 3-Month Term SOFR interest payments on the basis of market data as of January 1, 20X1, as required by paragraphs . In performing this assessment, Entity A assumes that 3-Month Term SOFR was and will continue to be the contractually specified interest rate designated in the hedging relationship. Entity A determines that the revised hedging relationship is expected to continue to be highly effective at achieving offsetting cash flows attributable to 3-Month Term SOFR on a prospective basis and continues to apply hedge accounting.815-30-55-176
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On April 1, 20X4, Entity A elects to make future interest payments on the existing choose-your-rate debt instrument based on Prime, payable every 30 days, with the rate resetting immediately following each payment. Consistent with Entity A’s hedge documentation, this election automatically changes the contractually specified interest rate in the hedging relationship from 1-Month Term SOFR to Prime (30-day reset).815-30-55-177
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity A performs a final retrospective assessment of hedge effectiveness on the basis of changes in cash flows on 1-Month Term SOFR interest payments (payable every 30 days), assuming that the contractually specified interest rate will not change, and determines that the hedging relationship was highly effective through April 1, 20X4. Entity A then performs a prospective assessment of hedge effectiveness on the basis of changes in cash flows on Prime interest payments (payable every 30 days). When assessing hedge effectiveness with the new risk, Entity A creates the terms of the instrument used to estimate the changes in the cash flows of the Prime interest payments on the basis of market data as of January 1, 20X1, as required by paragraphs . In performing this assessment, Entity A assumes that 30-day Prime was and will continue to be the contractually specified interest rate in the hedging relationship. Entity A determines that the revised hedging relationship is not expected to be highly effective at achieving offsetting cash flows attributable to 30-day Prime on a prospective basis. As a result, Entity A discontinues hedge accounting but continues to report the previously recognized derivative gain or loss on the hedging instrument in accumulated other comprehensive income until the forecasted interest payments affect earnings or it is probable that the forecasted interest payments will not occur.815-30-55-178
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On April 1, 20X4, Entity A replaces the choose-your-rate debt instrument with a 1-year, $30 million 3-Month Term SOFR note, payable every 90 days. The replacement debt instrument does not need to be choose-your-rate debt in order for interest payments on the replacement debt to continue to be considered the forecasted transactions designated at hedge inception. That is, the replacement debt may have a single contractual variable rate or a list of possible contractual interest rate indexes and interest rate tenors from which the borrower may select. In either circumstance, if the interest rate index and interest rate tenor at which the replacement debt instrument is accruing interest match one of the interest rate index and interest rate tenor options included in the original choose-your-rate debt instrument, interest payments on the replacement debt will continue to be considered the designated forecasted transactions. However, if the replacement debt is fixed-rate debt or includes interest rate indexes or interest rate tenors not included in the terms of the original debt instrument and Entity A selects one of those interest rate indexes or interest rate tenors, the interest payments should not be considered the designated forecasted transactions. Once that instance becomes probable, the entity should discontinue applying hedge accounting and immediately reclassify the gain or loss on the hedging instrument recognized in accumulated other comprehensive income into earnings in accordance with paragraph 815-30-40-5. The entity also should consider whether it has demonstrated a pattern of determining that hedged forecasted transactions are probable of not occurring and the propriety of using hedge accounting in the future for similar forecasted transactions in accordance with paragraph 815-30-40-5.815-30-55-179
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Although the replacement debt matures before the end of the hedge period (that is, the replacement debt matures March 31, 20X5, while the hedge period ends March 31, 20X6), Entity A determines that it is probable that it will issue eligible replacement debt for the remaining hedge period. Accordingly, while the currently outstanding replacement debt matures before the end of the hedge period, Entity A may continue to apply hedge accounting because it is probable that replacement debt will accrue interest payments over the remainder of the hedge period at one of the interest rate indexes and interest rate tenors included in the terms of the original choose-your-rate debt instrument. In addition, the forecasted interest payments on the outstanding replacement debt instrument should be considered the forecasted transactions in accordance with paragraph 815-30-35-37K because the interest rate specified in the outstanding replacement debt (3-Month Term SOFR) was an interest rate index and interest rate tenor option included in the original choose-your-rate debt instrument. The fact that the principal of the outstanding replacement debt exceeds the principal hedged does not result in interest payments on the replacement debt instrument being ineligible to be hedged. Consistent with Entity A’s hedge documentation, replacing the hedged debt instrument automatically changes the contractually specified interest rate designated in the hedging relationship from 1-Month Term SOFR to 3-Month Term SOFR.815-30-55-180
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7Entity A performs a final retrospective assessment of hedge effectiveness on the basis of changes in cash flows on 1-Month Term SOFR interest payments (payable every 30 days), assuming that the contractually specified interest rate will not change, and determines that the hedging relationship was highly effective through April 1, 20X4. Entity A then performs a prospective assessment of hedge effectiveness on the basis of changes in cash flows on 3-Month Term SOFR interest payments (payable every 90 days). When assessing hedge effectiveness with the new risk, Entity A creates the terms of the instrument used to estimate the changes in the cash flows of the 3-Month Term SOFR interest payments on the basis of market data as of January 1, 20X1, as required by paragraphs . In performing this assessment, Entity A assumes that 3-Month Term SOFR was and will continue to be the contractually specified interest rate designated in the hedging relationship. Entity A determines that the revised hedging relationship is expected to continue to be highly effective at achieving offsetting cash flows attributable to 3-Month Term SOFR on a prospective basis and continues to apply hedge accounting.815-30-55-181
Transition date:(P) December 16, 2026; (N) December 16, 2027Transition guidance:
815-20-65-7On April 1, 20X4, Entity A replaces the choose-your-rate debt instrument with a 2-year, $20 million 12-Month Term SOFR note, payable every 360 days. Because 12-Month Term SOFR was not listed as one of the interest rate index and interest rate tenor options included in the original choose-your-rate debt instrument, interest payments on this 12-Month Term SOFR note are not eligible to be designated as hedged forecasted transactions. Once it becomes probable that the choose-your-rate debt instrument will be replaced with a 2-year, $20 million 12-Month Term SOFR note that is payable every 360 days, Entity A must immediately reclassify amounts previously recognized in accumulated other comprehensive income into earnings in accordance with paragraph 815-30-40-5. Entity A also should consider whether it has demonstrated a pattern of determining that hedged forecasted transactions are probable of not occurring and the propriety of using hedge accounting in the future for similar forecasted transactions in accordance with paragraph 815-30-40-5.815-30-S00StatusSEC
Source downloaded: .Record version 813756b8e5b6. Effective date must be checked in the source.
815-30-S00-1
The following table identifies the changes made to this Subtopic.
| Paragraph | Action | Accounting Standards Update | Date |
| 815-30-S45-1 | Superseded | Accounting Standards Update No. 2010-04 | 01/15/2010 |
815-30-S45Other Presentation MattersSEC
Source downloaded: .Record version 81988c14bc9f. Effective date must be checked in the source.
Related subtopics
- 815-35 Net Investment HedgesDerivatives and Hedging
- 815-20 Hedging—GeneralDerivatives and Hedging
- 815-25 Fair Value HedgesDerivatives and Hedging
- 325-40 Beneficial Interests in Securitized Financial AssetsInvestments—Other
- 860-30 Secured Borrowing and CollateralTransfers and Servicing
- 326-20 Measured at Amortized CostFinancial Instruments—Credit Losses