A guide to hedge accounting

Dec 19, 2023
Audit Financial reporting Financial institutions Derivatives & hedging

This article was originally published in February 2017 and has been updated.

Our publication, A guide to hedge accounting, is intended to provide a high-level overview of hedge accounting based on the hedging subtopics 815-20 through 815-35 within the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification. More specifically, the guide includes the following:

  • Chapter 1: Content overview
  • Chapter 2: Overview of hedge accounting and the requirements to apply it, which: (a) provides a high-level overview of hedge accounting, including the three major types of hedges and (b) summarizes the requirements that need to be met to apply hedge accounting, including: (i) formal designation and documentation, (ii) eligible hedged items and transactions, (iii) eligible hedging instruments and (iv) the requirement to assess the effectiveness of hedges.
  • Chapter 3: Commodities hedging, which: (a) provides an overview of commodities hedging by discussing the types of hedges that are commonly employed in practice, (b) provides suggestions for structuring hedges in a manner that will promote high effectiveness, (c) discusses the benefits of, and requirements to, hedge a contractually specified component and (d) provides several examples of commodities hedges.
  • Chapter 4: Hedges related to interest rate risk, which provides: (a) an overview of hedges related to interest rate risk, including a discussion of the types of cash flow and fair value hedges that are commonly employed, (b) a discussion of the accounting implications of hedging interest rate risk rather than hedging total changes in cash flows or fair value and (c) several examples of hedges of interest rate risk.
  • Chapter 5: Foreign currency hedges, which provides: (a) an overview of foreign currency hedges and the incremental requirements associated therewith to qualify for hedge accounting, (b) an overview of the accounting for net investment hedges and (c) several examples of foreign currency hedging.
  • Chapter 6: Fair value hedge accounting, which is focused on the mechanics of fair value hedge accounting, including the adjustments to the hedged item, and discontinuing hedge accounting.
  • Chapter 7: Cash flow hedge accounting, which is focused on the mechanics of cash flow hedge accounting, including the reclassification of amounts in other comprehensive income to earnings, and discontinuing hedge accounting.

The December 2023 edition of this guide has been updated to incorporate guidance from the following Accounting Standards Updates (ASUs) issued by the FASB:

  • ASU 2021-01, Reference Rate Reform (Topic 848): Scope
  • ASU-2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method
  • ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848

The edition has also been updated to (i) incorporate the elimination of LIBOR after June 30, 2023 and the extension of the sunset date for application of Topic 848, (ii) remove references to pre- and post-ASU 2017-12 due to the current applicability of that ASU, and (iii) update Appendix A: High level overview of ASU 2022-01.

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