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ASC 815 requires that all derivative instruments within its scope (including embedded derivatives that have been separated from their host contracts for accounting purposes) be recognized and subsequently measured on the balance sheet at fair value in accordance with ASC 820, Fair Value Measurement, regardless of whether the derivative is designated as a hedge or used for a purpose other than hedging.
ASC 815’s requirement to reflect changes in the fair value of a derivative in the income statement each period may create volatility. If certain qualifying criteria are met, reporting entities can use hedge accounting to reduce the earnings volatility that would otherwise result from recording changes in the fair value of the derivative in one period and the income statement impact of the hedged risk in another period. In other words, there is a matching in the income statement. (For fair value hedges, there may be some mismatch, as explained in DH 5.4.)
The accounting for changes in the fair value of a derivative for a given period will depend on the intended use of the derivative, whether it qualifies for hedge accounting, and what type of hedge it is.
ASC 815 divides hedges into categories with specific accounting guidance for each. That guidance determines how the matching is achieved. Figure DH 5-1 summarizes the treatment of a derivative that qualifies as a hedging instrument in each type of hedge.
Figure DH 5-1
Recognition of hedging instruments by type of hedge
Type of hedge
Recognition of gains or losses on the hedging instrument
Guide reference
Cash flow hedge, including foreign currency cash flow hedge
In other comprehensive income (OCI) until the hedged transaction impacts earnings, at which time amounts reported in OCI will be recognized in earnings.
DH 6.3 for hedges of financial items
DH 7.3 DH 7.3 for hedges of nonfinancial items

DH 8.4 for hedges of foreign currency risk
Fair value hedge, including foreign currency fair value hedge
In earnings and offset by recognition of changes in fair value of the hedged item (for the hedged risk)
DH 6.4 for hedges of financial items
DH 7.4 for hedges of nonfinancial items
DH 8.5 for hedges of foreign currency risk
Foreign currency hedge (except for a net investment hedge)
Depending on the hedging relationship, it may be either as a cash flow or fair value hedge and would be reflected accordingly
DH 8 for hedges of foreign currency risk
Net investment hedge (special type of foreign currency hedge)
In cumulative translation adjustment until the hedged net investment is sold or liquidated

DH 8.6 for hedges of foreign currency risk

5.2.1 Unit of account

The unit of account in ASC 815 is generally the individual derivative. Hedge accounting guidance requires a reporting entity to designate hedging relationships at a transaction level and limits the degree to which transactions can be grouped or aggregated. This may be different from how some reporting entities manage their risk mitigation activities, which may consider the risks of a portfolio or the net risk after offsetting certain positions.
1 There is a simplified approach available for certain private company hedging relationships that results in measurement of a derivative at settlement value if certain criteria are met. This is discussed in DH 11.
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