# ASC 815-45-55: Derivatives and Hedging — Weather Derivatives — 55 Implementation Guidance and Illustrations Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/815/45/#55-implementation-guidance-and-illustrations) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:e0c5d44f23715635f54bbc5f39523cdb4d20544d627cc2ffa07d7fd4e272f2ab Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 815-45-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/815/45/#55-implementation-guidance-and-illustrations) SEC content: no #### Implementation Guidance ##### [815-45-55-1](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:3a397d1e61e4b7b8a194144cde8926a772cc3699284190588dc8631537af351e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Determining whether or when an entity is involved in [trading](https://asc.understandingaccounting.org/glossary/t/#trading "An activity involving securities sold in the near term and held for only a short period of time. The term trading contemplates a holding period generally measured in hours and days rather than months or years. See paragraph 948-310-40-1 for clarification of the term trading for a mortgage banking entity.") or speculative activities involving [weather derivative](https://asc.understandingaccounting.org/glossary/w/#weather-derivative "A forward-based or option-based contract for which settlement is based on a climatic or geological variable. One example of such a variable is the occurrence or nonoccurrence of a specified amount of snow at a specified location within a specified period of time.") contracts is a matter of judgment that depends on the relevant facts and circumstances. The framework in which such facts and circumstances are assessed shall be based on an evaluation of the various activities of an entity rather than solely on the terms of the contracts. Inherent in that framework is an evaluation of the entity's intent for entering into a weather derivative contract. ##### [815-45-55-2](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:f94aa34b979012970f38aabb96c680267137bd8017762508e683c4eb196d0ed9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. It is easier to evaluate the trading activities of an entity if such activities are segregated either organizationally or by legal entity. If an entity conducts both trading activities and nontrading activities and those activities are not segregated either organizationally or by legal entity, it is essential that the entity analyze contracts at inception according to the factors in paragraphs [815-45-55-5 through 55-6](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-5) and identify those contracts as either trading or nontrading. However, if an operation's trading activities are not segregated in either of those ways and an evaluation of the indicators identified in paragraphs [815-45-55-4 through 55-6](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-4) would conclude that a portion of the operation's activities are trading, then only that portion of the operation's activities that is considered trading shall be accounted for at [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."). ##### [815-45-55-3](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:23bfed428991b54bfb407d30f09b52d16c33b25f2fd52ab6f257a3103930f903 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As used in this Subtopic, operation refers to any identifiable activity of an entity (for example, a subsidiary, a division, or a unit) that enters into the types of weather derivative contracts that are within the scope of this Subtopic. ##### [815-45-55-4](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:0ae4a52913cdcd11bd3fa3ed387cfc1292d65c6fc4cbeec69e1f1530b2fea5ad Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For purposes of identifying trading activities, the following groups of indicators shall be considered for each identifiable operation (activity) of an entity that enters into weather derivative contracts that are within the scope of this Subtopic. Category A lists the fundamental indicators to be considered for purposes of determining whether the operation of an entity that enters into weather derivative contracts is involved in trading activities. Accordingly, the presence of indicators from Category A may be a strong indication that the operation's activities are trading. The presence of indicators from only Category B may indicate that such activities are trading. The absence of any or all of the indicators in either category, by itself, shall not preclude the operation's activities from being considered trading. Nevertheless, all available evidence shall be considered to determine whether, based on the weight of that evidence, an operation is involved in trading activities. ##### [815-45-55-5](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:4c662013210fbf1efba689a08c95fb180ed222414dd9de0ce09b0b4bc5483a63 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. All of the following are fundamental indicators in Category A: 1. a The operation's primary business is not inherently exposed to the specific weather-related risk stated as a variable (for example, temperature, wind velocity, and humidity) in the weather derivative contracts it holds. 2. b The volume of weather derivative contracts exceeds a reasonable or supportable level of weather-related risk inherent in the operation's primary business. 3. c The change in value of the weather derivative contract (for example, based on a temperature variable) is expected to move in a direction that does not mitigate or offset the risk of the underlying exposure (for example, fuel consumption). 4. d The operation develops and uses its own proprietary models to price the weather derivative contracts it offers or trades. ##### [815-45-55-6](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:8e6fd0a4780c6d483d333b08a5dd433c55e3e074af9607ae31add3fc65a2d1d4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. All of the following are secondary indicators (management and controls) in Category B: 1. a Compensation and/or performance measures are tied to the short-term results generated from weather derivative contracts (that is, the operation is measured based on trading profits or changes in the fair values of its positions as opposed to profitable management of income-producing assets). 2. b The operation communicates internally in terms of trading strategy (that is, management reports identify contractual positions, fair values, risk exposure, and so forth). 3. c The word trading is in the name of the operation for internal or external purposes. 4. d Employees of the operation are referred to as traders or have prior experience in derivative trading or risk-management activities. 5. e Assessment of net market positions of the operation is done on a regular basis. 6. f Infrastructure of the operation is similar to that of a trading operation of a bank or investment bank—front office, middle office, and back office (that is, there is a segregation of back-office processing and front-office trading functions). 7. g An infrastructure exists that enables the operation to capture price and other risks on a real-time basis. 8. h The activities are managed on a portfolio or book basis. #### Illustrations ##### [815-45-55-7](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:c581deab527db4ae13674400749fb9454e9413b0c3cb5eac90f9c88d4648e4b9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate two types of degree-day contracts: 1. a A degree-day swap (Case A) 2. b A degree-day option (Case B). ##### [815-45-55-8](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:f798f85a517507035bb8c729d46a4eeae11916a98eca1e9c2caf753be04e4799 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cases A and B share all of the following assumptions: 1. a Entity A is a construction materials entity that has its sales decrease during cold winters or a chemical manufacturer that has its natural gas consumption costs increase during cold winters. Entity B is a natural gas distribution entity that experiences lower revenues during warm winters. 2. b Neither Entity A nor Entity B is a dealer in weather derivatives (that is, the operations of both entities that entered into this contract are nontrading). 3. c At inception of each contract, the reporting entity constructs the allocation (as presented in the table in paragraph [815-45-55-11](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-11)) of the strike level of heating degree days across the contract period based on historical heating degree day averages (the weather-related index) for the respective months. That allocation is not part of the contract terms. (Heating degree days is the winter measure of average daily temperature below 65 degrees Fahrenheit.) 4. d Actual heating degree days (as presented in the table in paragraph [815-45-55-11](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-11)) reflect the measure of actual average daily temperatures below 65 degrees Fahrenheit based on weather service readings. If the average of the daily high and the daily low temperatures is 34 degrees Fahrenheit, then there are 31 heating degree days for that day. To determine the number of heating degree days for a period, add heating degree days for each day of the period. ##### [815-45-55-9](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:a87a7924080e900284bf480f2d13cd3a87561dbae442a4f40d5e213fc2d528b7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A and Entity B enter into a degree-day swap (that is, a contract with two-directional risk).The contract requires no initial net investment and requires a payment by Entity A to Entity B if cumulative heating degree days are less than 4,500 heating degree days during the period from November 1, 1999, to March 31, 2000. If cumulative heating degree days exceed 4,500 heating degree days during that same period, Entity B will make a payment to Entity A. The contract has a floor of 2,500 heating degree days and a cap of 6,500 heating degree days. The payment under the contract is equal to $10,000 multiplied by the cumulative number of heating degree days above or below 4,500 heating degree days and is made on April 5, 2000. Based on the foregoing terms, this contract carries a maximum payout limitation of $20 million by Entity A and $20 million by Entity B regardless of actual temperature levels experienced. The accounting for the degree-day swap by both parties is presented in the table in paragraph [815-45-55-11](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-11). ##### [815-45-55-10](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:fe2c1aa6bdbc10510118cf2ed77f8f849ea204692125ccf72b4237e7139527e1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A purchases on November 1, 1999, a degree-day option from Entity B for a premium payment of $5.85 million. The option requires that Entity B pay Entity A $10,000 for each heating degree day in excess of 4,500 heating degree days (the strike level) cumulative during the period from November 1, 1999, to March 31, 2000. This contract specifies a maximum payout limitation of $20 million regardless of actual temperature levels experienced, thereby effectively stipulating a cap based on 6,500 heating degree days. The contract is settled on April 5, 2000. The accounting for the purchased degree-day option by both parties is presented in the table in the following paragraph. The accounting does not include amounts related to the option premium of $5.85 million. ##### [815-45-55-11](https://asc.understandingaccounting.org/asc/815/45/#815-45-55-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:50.034Z to 2026-09-10T01:39:50.034Z Record version: sha256:e893d1c93a9e8cef44c98f574eca71ddd39f827ab7024d9a4b38ed112680c0b7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table presents the accounting by both parties for the weather derivatives in Cases A and B. - ![](https://asc.understandingaccounting.org/asc-img/GUID-C91956B9-C914-4F74-B8FD-C5ABCDE952E4-low.gif) November December January February March Totals Assumption—average historical temperature 48 degrees 33 degrees 26 degrees 26 degrees 42 degrees Allocation of heating degree days strike 500 (a) " 1,000 " (b) " 1,200 " (c) " 1,100 " (d) 700 (e) " 4,500 " Actual heating degree days 600 700 " 1,700 " " 1,700 " 500 " 5,200 " Warmer (colder) than average in heating degree days (100) 300 (500) (600) 200 (700) Cumulative warmer (colder) in heating degree days (100) 200 (300) (900) (700) Cumulative actual heating degree days 600 " 1,300 " " 3,000 " " 4,700 " " 5,200 " Accounting for degree-day swap: Current period Entity A loss (gain) " $(1,000,000)" " $3,000,000 " " $(5,000,000)" " $(6,000,000)" " $2,000,000 " " $(7,000,000)" Cumulative Entity A loss(gain) " $(1,000,000)" " $2,000,000 " " $(3,000,000)" " $(9,000,000)" " $(7,000,000)" Current period Entity B loss (gain) " $1,000,000 " " $(3,000,000)" " $5,000,000 " " $6,000,000 " " $(2,000,000)" " $7,000,000 " Cumulative Entity B loss (gain) " $1,000,000 " " $(2,000,000)" " $3,000,000 " " $9,000,000 " " $7,000,000 " Accounting for purchased degree-day option: Current period Entity A loss (gain) " $(1,000,000)" " $1,000,000 " " $(3,000,000)" " $(6,000,000)" " $2,000,000 " " $(7,000,000)" Cumulative Entity A loss (gain) " $(1,000,000)" - " $(3,000,000)" " $(9,000,000)" " $(7,000,000)" (a) "(65 - 48) × 30 = 510, rounded to 500 for presentation purposes." (b) "(65 - 33) × 31 = 992, rounded to 1,000 for presentation purposes." (c) "(65 - 26) × 31 = 1,209, rounded to 1,200 for presentation purposes." (d) "(65 - 26) × 28 = 1,092, rounded to 1,100 for presentation purposes." (e) "(65 - 42) × 31 = 713, rounded to 700 for presentation purposes."