In an acquisition, the acquired entity ceases to exist and the acquiring entity survives. Upon acquisition, ASC 815-20-55-199 through ASC 815-20-55-203, Example 24: No Continuation of the Shortcut Method Following a Purchase Business Combination, states that an acquired entity cannot continue a shortcut method hedge following a purchase business combination because the original hedging relationship is dedesignated, and a new hedging relationship is redesignated at the combined-entity level. At that point, the new hedging relationships will need to be reassessed to determine whether they qualify for the shortcut method at the combined-entity level, which is extremely unlikely because the derivatives would have fair values other than zero at the inception date of the new hedging relationship.
The new entity will need to elect whether or not to designate derivatives acquired as part of a business combination in new hedge relationships and demonstrate that the new hedging relationships meet all of the criteria to achieve hedge accounting, including that they are expected to be highly effective. It may be challenging to achieve hedge accounting for a redesignated hedge following a purchase business combination because:
  • the derivatives likely have a fair value other than zero at the acquisition date,
  • the hedged assets and liabilities, which are measured at fair value in a business combination, likely have a different basis than they did in the original hedging relationship, and
  • the probability of a forecasted transaction occurring could change upon a business combination.
Expand Expand

Welcome to Viewpoint, the new platform that replaces Inform. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

signin option menu option suggested option contentmouse option displaycontent option contentpage option relatedlink option prevandafter option trending option searchicon option search option feedback option end slide