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A cash flow value hedge is discontinued when any of the following occurs:
  • Hedge is no longer highly effective (DH 10.4.1)
  • Hedging instrument is sold, extinguished, terminated, exercised, or expired (DH 10.4.2)
  • Hedging instrument is dedesignated in its entirety (DH 10.4.3) or in part (DH 10.4.3.1), although it may be subsequently redesignated in a hedging relationship (DH 10.4.4)
  • Forecasted transaction is no longer probable but is reasonably possible of occurring (DH 10.4.5)
  • Forecasted transaction is probable of not occurring (DH 10.4.6)
  • Forecasted transaction is probable of occurring, but on a date more than two months after the initially-specified period (DH 10.4.7)
  • Variability of cash flows ceases (DH 10.4.9)
A reporting entity is required to continually reassess the probability of a forecasted transaction occurring to determine if existing hedging relationships can continue and determine if any amounts in AOCI should be reclassified to earnings.
When a cash flow hedge is discontinued, the net derivative gain or loss remains in AOCI unless it is probable that the forecasted transaction will not occur in the originally-specified time period, range, or within an additional two-month period thereafter. The additional two-month period relates only to when the gain or loss on the derivative should be reclassified, not when hedge accounting should be discontinued. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside the control or influence of the reporting entity.
If it is probable that the hedged forecasted transaction will not occur by the end of the originally-specified time period, range or within the additional two-month period and the transaction does not qualify for the extenuating circumstances exception, the derivative gain or loss in AOCI should be reclassified to earnings immediately. Probability of the forecasted transaction is addressed in DH 6.3.3.4 for hedges of financial items and DH 7.3.2.2 for hedges of nonfinancial items.
A pattern of determining that hedged forecasted transactions will not occur will call into question a reporting entity’s ability to accurately predict forecasted transactions and the propriety of using hedge accounting in the future for similar forecasted transactions. Reporting entities should develop a process to identify if and when specific forecasted transactions become less than probable of occurring.
ASC 815-30-40-6 precludes reversing gains/losses that were reclassified to earnings back to OCI due to a re-assessment of probabilities (e.g., if the reporting entity later concluded the forecasted transaction was again probable of occurring).
Examples included in ASC 815 provide further guidance on how documentation and probability assessments impact hedge accounting and amounts deferred in AOCI.
ASC reference
Title
Example 4: Variable Interest Payments on a Group of Variable-Rate Interest-Bearing Loans
Example 16: Impact on Accumulated Other Comprehensive Income of Issuing Debt with a Term That Is Shorter Than Originally Forecasted
Example 21: Effect on Accumulated Other Comprehensive Income from Issuing Debt at a Date That Is Not the Same as Originally Forecasted
ASC 815-30-40-6A indicates that reclassifying excluded components recognized through an amortization approach to earnings follows the same guidance as for the gain or loss on the derivative in discontinued hedges.

815-30-40-6A

When applying the guidance in paragraph 815-20-25-83A if the hedged forecasted transaction is probable of not occurring, any amounts remaining in accumulated other comprehensive income related to amounts excluded from the assessment of effectiveness shall be recorded in earnings in the current period. For all other discontinued cash flow hedges, any amounts associated with the excluded component remaining in accumulated other comprehensive income shall be recorded in earnings when the hedged forecasted transaction affects earnings.

10.4.1 Hedge is no longer highly effective

If a cash flow hedging relationship does not pass the prospective effectiveness test, hedge accounting should be discontinued going forward.
If a cash flow hedging relationship does not pass the retrospective effectiveness test, hedge accounting should be discontinued as of the last date when the hedged item was assessed and demonstrated high effectiveness, unless a reporting entity can determine a specific point that it failed to be effective.
Assume a reporting entity determines that a hedging relationship did not pass the prospective and retrospective effectiveness assessments during its monthly effectiveness assessment on July 31, 20X1. Hedge accounting should be discontinued as of June 30, 20X1, the last date on which the hedged item was assessed and demonstrated high effectiveness. The reporting entity would stop hedge accounting as of that date, unless it can determine a specific point in July of 20X1 on which it failed to be effective.
If the cash flow hedge is no longer effective, but the forecasted transaction is not probable of not occurring, the amounts previously recorded in AOCI, including amounts remaining related to excluded components that were recognized through an amortization approach, remain there until the forecasted transaction impacts earnings.

10.4.2 Hedge is sold, extinguished, terminated, exercised, or expires

If a cash flow hedging instrument is sold, extinguished, terminated, exercised, or expires, it is derecognized and the amounts in AOCI, including amounts remaining related to excluded components that were recognized through an amortization approach, remain there until the forecasted transaction impacts earnings unless the forecasted transaction becomes probable of not occurring.

10.4.3 Hedging instrument is dedesignated

When a reporting entity dedesignates or voluntarily discontinues a cash flow hedge and the forecasted transaction giving rise to variability in future cash flows will occur as expected, gains and losses that are in AOCI, including amounts remaining related to excluded components that were recognized through an amortization approach, will not be affected. In these cases, gains and losses remain in AOCI until the forecasted transaction impacts earnings.
Future changes in the derivative’s fair value after discontinuance of hedge accounting, however, will be recorded in current-period earnings if the derivative is not terminated or redesignated in a qualifying hedge.

10.4.3.1 Partial dedesignation of the hedging instrument

We believe partial dedesignation of cash flow hedging instruments is permitted in some instances.
In determining whether or not proportional dedesignation is acceptable under ASC 815-30-40-1, we considered ASC 815-20-25-45, which allows for proportional designation, and Example 11: Cash Flow Hedge of the Foreign Currency Exposure in a Royalty Arrangements, in ASC 815-30-55-72, which discusses proportional dedesignation.
The dedesignated portion of the derivative may be redesignated in a new hedging relationship, as illustrated in Example DH 10-2.
EXAMPLE DH 10-2
Redesignation of a portion of a derivative
USA Corp is a US dollar functional currency manufacturing company.
USA Corp forecasts that it will sell 2,000 euro (EUR) of inventory on November 15, 20X1. The sales have not been firmly committed to, but historical experience and sales forecasts indicate that sales are probable.
On January 15, 20X1, USA Corp enters into a ten-month foreign currency forward contract to deliver EUR 1,000 and receive USD to hedge the foreign currency risk associated with the sale of the first EUR 1,000 of forecasted sales of inventory on November 15, 20X1.
In March 20X1, USA Corp re-evaluates its foreign currency exposure and decides to decrease the hedged amount to the first EUR 800 of forecasted sales of inventory expected on November 15, 20X1; however, the original EUR 1,000 of sales are still probable of occurring.
Can USA Corp partially dedesignate EUR 200 of the derivative and continue hedge accounting for the remaining EUR 800 under the existing hedging relationship?
Analysis
Yes. USA Corp may dedesignate EUR 200 of hedged item and EUR 200 of hedging instrument notional amount and continue to apply hedge accounting for the remaining EUR 800.
We believe partial dedesignation may be an acceptable alternative to full dedesignation and redesignation in certain circumstances. In this example, the cash flow hedging relationship remains intact for the portion associated with the first EUR 800 of notional value of the original transaction.

10.4.4 Hedge is dedesignated and subsequently redesignated again

If the hedging instrument is dedesignated and subsequently redesignated in a new hedging relationship, the amount in AOCI related to the first hedging relationship, including amounts remaining related to excluded components that were recognized through an amortization approach, would remain there until the first forecasted transaction impacts earnings, provided that the forecasted transaction does not become probable of not occurring.
The hedging instrument would be accounted for in its new hedging relationship from the point of redesignation onward.

10.4.5 Forecasted transaction is reasonably possible of occurring

When a reporting entity determines it is reasonably possible but not probable that the forecasted transaction will not occur, the hedging relationship must be terminated, but gains and losses that are in AOCI, including amounts remaining related to excluded components that were recognized through an amortization approach, will remain there until the forecasted transaction impacts earnings or until it later becomes probable of not occurring.

10.4.6 Forecasted transaction is probable of not occurring

When a reporting entity determines that it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time, amounts deferred in AOCI are recognized immediately.
When a hedged forecasted transaction is probable of not occurring, ASC 815-30-40-6A requires any amounts remaining in AOCI related to the excluded components to be recorded in earnings.

10.4.7 Extenuating circumstances impact the forecasted transaction

Generally, a forecasted transaction being probable of occurring on a date more than two months after the originally-specified period would result in dedesignation of the hedging relationship and a reclassification of amounts recorded in AOCI. In rare circumstances, the existence of extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of the reporting entity may cause the forecasted transaction to be probable of occurring on a date that is beyond the additional two-month period of time. In such rare circumstances, ASC 815-30-40-4 permits the net derivative gain or loss related to the discontinued cash flow hedge to remain in AOCI until the forecasted transaction impacts earnings.

10.4.8 Impact of documentation on probability of forecast occurring

How a reporting entity specifically defines its forecasted transaction can significantly impact (1) when it must dedesignate a hedging relationship and (2) when the deferred gains or losses on the hedging instrument get reclassified from AOCI into earnings. The key is to be specific enough such that it is clear when the forecasted transaction occurs. However, the more specific the designation, the more likely that unanticipated changes in the terms of the forecasted transaction could result in the termination of the hedging relationship and the potential release of AOCI.

10.4.8.1 Summary - Impact of probability of forecasted transactions

Figure DH 10-1 illustrates the impact of probability of forecasted transactions on the continuation of hedge accounting and the amounts in AOCI.
Figure DH 10-1
Assessing probability of forecasted transactions
Probability of forecasted transaction(s) occurring
Impact on hedge accounting going forward (assuming no voluntary dedesignation)
Impact on OCI/AOCI (including excluded components recognized through an amortization approach)
Probable of occurring
Continue hedge accounting
Current-period amounts are deferred through OCI, and cumulative amounts deferred are reclassified from AOCI when the forecasted transaction affects earnings.
Reasonably possible of occurring (DH 10.4.5)
Discontinue
No further amounts are deferred through OCI.
Amounts previously deferred remain in AOCI until the forecasted transaction either affects earnings or subsequently becomes probable of not occurring.
Reasonably possible of not occurring
Discontinue
No further amounts are deferred through OCI.
Amounts previously deferred remain in AOCI until the forecasted transaction either affects earnings or subsequently becomes probable of not occurring.
Probable of not occurring (DH 10.4.6)
Discontinue
Amounts previously deferred in AOCI are reclassified immediately to earnings.

10.4.9 Variability of cash flows ceases

Cash flow hedge accounting is required to be discontinued when the variability in cash flows of the hedged forecasted transaction cease, for example, when a forecasted transaction becomes a firm commitment. The amounts in AOCI related to the gain or loss on the derivative and the components excluded from the assessment of effectiveness that were not yet amortized related to the time that it is in a designated hedging relationship would remain deferred there until the forecasted transaction impacts earnings. After discontinuance, the hedging instrument would be either (1) measured at fair value through current earnings or (2) in a new hedging relationship (if it is redesignated) from the point of redesignation onward.
In the example of a forecasted transaction that becomes a firm commitment, the firm commitment could be designated as the hedged item in a new fair value hedging relationship. See DH 7.3.6.2.
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