Measuring impairment related to a hedged loan that is adjusted for changes in fair value attributable to the hedged risk is addressed in ASC 310-10-35-31. The key issue in determining impairment is whether the present value of expected cash flows is to be discounted using the new effective rate (based on the adjusted recorded investment), rather than by the original effective rate, excluding any fair value hedge adjustments.

ASC 815, Derivatives and Hedging, impacts the measurement of impairment under ASC 310-10 or ASC 310-40 by requiring that the present value of expected future cash flows be discounted by using the new effective rate based on the adjusted recorded investment in a hedged loan. When the recorded investment of a loan has been adjusted under fair value hedge accounting, the effective rate is the discount rate that equates the present value of the loan's future cash flows with that adjusted recorded investment. The adjustment under fair value hedge accounting of the loan's carrying amount for changes in fair value attributable to the hedged risk under ASC 815 should be considered to be an adjustment of the loan's recorded investment.

ASC 815 supports using the new effective rate and the adjusted recorded investment, and requires that the loan's carrying amount be adjusted for hedge accounting before the impairment requirements of ASC 310-10 are applied (see ASC 815-25-35-10). The loan's original effective interest rate becomes irrelevant once the recorded amount of the loan is adjusted for any changes in its fair value.

This guidance applies to all entities applying ASC 310-10 to financial assets that are hedged items in a fair value hedge, regardless of whether those entities have delayed amortizing to earnings the adjustments of the loan's carrying amount arising from fair value hedge accounting until the hedging relationship is de-designated.