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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 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.
However, Example 24 does not provide guidance for acquired companies that continue to exist within the combined entity and issue standalone financial statements. Pushdown accounting represents the termination of the old accounting entity and the creation of a new one. Therefore, if pushdown accounting is applied to the acquired company, the acquired company as an accounting entity ceases to exist. Consistent with the guidance with respect to the consolidated financial statements of the acquirer, we believe that when pushdown accounting is applied in the standalone financial statements of an acquired entity, hedging relationships at the acquired-company level must be reassessed to determine whether they again qualify for hedge accounting (i.e., after they are dedesignated and redesignated). However, if pushdown accounting is not applied, the acquired company may continue to account for its own hedging relationships based on the preacquisition designations in its standalone financial statements. This is true even though those hedging relationships must be discontinued and redesignated at the consolidated level.
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