{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/815/30/#35-subsequent-measurement","source":"FASB Accounting Standards Codification, Basic View","usage":"Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective.","topic":"815","topic_title":"Derivatives and Hedging","subtopic":"815-30","subtopic_title":"Cash Flow Hedges","section":{"number":"35","label":"35 Subsequent Measurement","anchor":"35-subsequent-measurement","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"815-30-35-1","para":"35-1","html":"The guidance in this Section is organized as follows:
- a
Subsequent recognition and measurement of gains and losses on hedging instrument
- b
Reclassifications from accumulated other comprehensive income into earnings
- c
Hedging relationship's timing that involves uncertainty within a range
- d
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: - a
An 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. - b
Amounts 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
- 1a
The derivative instrument's gains or losses previously reclassified from accumulated other comprehensive income into earnings pursuant to paragraphs . - 1b
The cumulative amount amortized to earnings related to excluded components accounted for through an amortization approach in accordance with paragraph 815-20-25-83A. - 1c
The 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
- d
If 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
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. 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. 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. The remainder of this guidance addresses the following matters:
- a
Application to single cash flow hedge of a forecasted sale or purchase on credit for foreign exchange risk
- b
Assessing hedge effectiveness in certain cash flow hedges involving
interest rate risk when effectiveness is assessed on a quantitative basis - c
Hedging relationship in which hedge effectiveness is based on an option's terminal value.
- d
Change in the designated hedged risk.
(P) December 16, 2026; (N) December 16, 2027
815-20-65-7The remainder of this guidance addresses the following matters:
- a
Application to single cash flow hedge of a forecasted sale or purchase on credit for foreign exchange risk
- b
Assessing hedge effectiveness in certain cash flow hedges involving
interest rate risk when effectiveness is assessed on a quantitative basis - c
Hedging relationship in which hedge effectiveness is based on an option's terminal value
- d
Change in the contractually specified interest rate for forecasted interest payments on choose-your-rate debt.
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: - a
The 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.
- b
The 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.
- c
For 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 . - d
The 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.
Example 18 (see paragraph 815-30-55-106) illustrates such a transaction. 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: - a
Change-in-variable-cash-flows method
- b
Hypothetical-derivative method
- c
Change-in-fair-value method.
Those three methods relate to assessing the effectiveness of a cash flow hedge that involves any of the following: - a
A receive-variable, pay-fixed interest rate swap designated as a hedge of the variable interest payments on an existing floating-rate liability
- b
A receive-fixed, pay-variable interest rate swap designated as a hedge of the variable interest receipts on an existing variable-rate asset
- c
Cash 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]).
The hedging relationships covered by this guidance encompass either of the following: - a
Hedges of interest rate risk (pursuant to paragraph 815-20-25-15(j)(2)) that do not qualify for the shortcut method - b
Hedges 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)).
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. 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.
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. 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. An entity shall assess hedge effectiveness under the change-in-variable-cash-flows method by comparing the following items: - a
The variable leg of the interest rate swap
- b
The hedged variable-rate cash flows on the asset or liability.
As noted in paragraph 815-30-35-14, the change-in-variable-cash-flows method shall not be used in certain circumstances. 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).
An entity shall assess hedge effectiveness under this method by comparing the following amounts: - a
The present value of the cumulative change in the expected future cash flows on the variable leg of the interest rate swap
- b
The present value of the cumulative change in the expected future interest cash flows on the variable-rate asset or liability.
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.
The change-in-variable-cash-flows method will result in a perfectly effective hedge if all of the following conditions are met: - a
- b
The 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.
- c
The 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).
- d
The likelihood of the obligor not defaulting is assessed as being probable.
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: - a
A 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)
- b
A 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.
Example 15 (see paragraph 815-30-55-91) illustrates the application of the change-in-variable-cash-flows method. An entity shall assess hedge effectiveness under the hypothetical-derivative method by comparing the following amounts: - a
The change in fair value of the actual interest rate swap designated as the hedging instrument
- b
The 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:
- 1
- 2
The same repricing dates
- 3
The 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)
- 4
Mirror image caps and floors
- 5
A zero fair value at the inception of the hedging relationship.
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. 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.
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.
An entity shall assess hedge effectiveness under the change-in-fair-value method by comparing the following amounts: - a
The present value of the cumulative change in expected variable future interest cash flows that are designated as the hedged transactions
- b
The cumulative change in the fair value of the interest rate swap designated as the hedging instrument.
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.
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: - a
The change in fair value of the actual hedging instrument
- b
The 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.
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).
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. (P) December 16, 2026; (N) December 16, 2027
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 |
Paragraph superseded by Accounting Standards Update No. 2025-09.(P) December 16, 2026; (N) December 16, 2027
815-20-65-7For a cash flow hedge of forecasted interest payments on choose-your-rate debt: - a
With 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: - 1
The 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.
- 2
The 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).
- b
With 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: - 1
The 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. - 2
The entity designates the hedged risk as the variability in cash flows attributable to changes in a contractually specified interest rate.
The guidance in paragraphs shall not be applied by analogy, including to hedges designated under the first-payments-received technique (Example 4, Case A [paragraphs ] illustrates this technique) or to hedges of a choose-your-rate debt instrument or group of choose-your-rate debt instruments classified as assets. (P) December 16, 2026; (N) December 16, 2027
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.(P) December 16, 2026; (N) December 16, 2027
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. (P) December 16, 2026; (N) December 16, 2027
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. (P) December 16, 2026; (N) December 16, 2027
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.(P) December 16, 2026; (N) December 16, 2027
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).(P) December 16, 2026; (N) December 16, 2027
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.(P) December 16, 2026; (N) December 16, 2027
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.(P) December 16, 2026; (N) December 16, 2027
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. (P) December 16, 2026; (N) December 16, 2027
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.(P) December 16, 2026; (N) December 16, 2027
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.(P) December 16, 2026; (N) December 16, 2027
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).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 . 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).
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.
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 .) 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.
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. 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.
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 . 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.
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.
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.
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.