ASC 815 permits hedging on an after-tax basis. This occurs most frequently for net investment hedges. The notional amount of the hedging instrument and designated hedged item are determined by considering the effect of taxes on the gain or loss recognized.

In net investment hedges, it is common for a US parent to hedge a foreign net investment on an after-tax basis when the parent has made a tax assertion that profits will be indefinitely reinvested and not remitted to the parent. In such a case, this tax assertion allowed the US parent to defer tax on the related CTA, and accordingly, the US parent would not provide for deferred taxes on the CTA.

For example, assume the notional amount of a hedged net investment in a foreign operation is $1,000. Due to an assertion that the earnings of the foreign operation will be indefinitely reinvested in the foreign operation, there is no deferred tax provided on CTA. If the tax rate is 40% and the reporting entity wants to hedge on an after-tax basis, then the notional amount of the hedging instrument should be $1,666.67 [$1,000/(1-40%)]. On an after-tax basis, the hedging instrument with $1,666.67 in notional has a notional of $1,000, matching the hedged item. In documenting the hedge, the documentation should indicate that the hedging instrument serves as a hedge on an after-tax basis.

When a net investment hedge is accounted for on an after-tax basis, gains and losses on the hedging instrument are recorded in CTA net of tax effects. This is accomplished by having the portion of the gain or loss on the hedging instrument that exceeds the loss or gain on the hedged item recorded as an offset of the related tax effects in the period that those tax effects are recognized.