Management should consider the impact of the bankruptcy on the reporting entity's derivative positions. As discussed at BLG 2.6, a reporting entity's derivative contracts may have lost their hedging effectiveness in the period leading up to the bankruptcy filing. Many derivative contracts, including derivatives subject to International Swaps and Derivatives Association (ISDA) rules, are automatically terminated upon the filing of bankruptcy as an event of default. In such a case, the reporting entity will need to account for the termination under the appropriate derivatives guidance, which would include the cessation of hedge accounting and the recognition in the income statement of amounts previously deferred in AOCI. Amounts in AOCI that relate to forecasted transactions that are no longer probable of occurring should be evaluated in accordance with ASC 815-30-40-4. If the occurrence of the transaction is in doubt, any related amounts in AOCI may need to be recognized in the income statement. Additionally, a receivable from or payable to the counterparty should be recorded. Any amounts owed may need to be classified as liabilities subject to compromise.

The continued application of hedge accounting to any contracts that are not terminated in bankruptcy should be carefully considered. For instance, counterparty risk and the probability of forecasted transactions for cash flows hedges may change.

Prior to filing for bankruptcy, a reporting entity might present a liability from a derivative or other financial instrument at a significant discount from its contractual amount (e.g., accounted for at fair value at a significant discount, which reflects the increased credit risk of the reporting entity). However, once the reporting entity files for bankruptcy, the measurement of a liability falls under the guidance of ASC 852-10, and the liability should be measured at the expected amount of the allowed claim, which could be significantly in excess of its pre-bankruptcy carrying amount. The adjustment to the expected amount of the allowed claim should be included within reorganization items in the income statement.