Expand
Resize
All derivatives should be recognized on the balance sheet at fair value unless the private company simplified approach (discussed in DH 11) is used.

19.3.1 Balance sheet presentation—classified

ASC 815 does not provide specific guidance on the balance sheet classification of derivatives. General guidance on classification is included in ASC 210-10-45 and detailed in FSP 2.3.4. A reporting entity with significant derivative activity should disclose its accounting policy for determining the balance sheet classification of derivatives.
Applying the general classification guidance to a derivative can be difficult since it may be an asset in one period and switch to a liability in the next period (or vice versa), and its fair value is often a “net” number that may consist of a current asset and a noncurrent liability or a noncurrent asset and a current liability.
Consistent with the guidance in ASC 210, a derivative should generally be separated into its current and noncurrent components depending on the timing of the cash flows. That is, the fair value related to the cash flows occurring within one year should be classified as current, and the fair value related to the cash flows occurring beyond one year should be classified as noncurrent. A reporting entity should review those individual derivatives whose fair values are net assets to ascertain whether the current portion is a liability. It will often know (or be able to estimate) whether the current portion of a derivative is a liability either through its knowledge of forward prices/rates for the underlying or from details contained in the derivative's valuation report.
In addition, given the unique nature of derivatives and the lack of specific classification guidance for them, we believe the following additional concepts should be applied to the determination of the balance sheet classification of a derivative in a classified balance sheet:
  • A derivative that matures within one year should be classified as current.
  • A derivative that allows the counterparty to terminate the arrangement at fair value at any time should be classified as current when its fair value is a net liability, as required by ASC 210-10-45-7 for liabilities due on demand (addressed in FSP 12.3.2.1). Such termination provisions may be found in either the trade confirmation or the master agreement with the counterparty.
Notwithstanding the above, a reporting entity may choose not to separate a derivative into its current and long-term portions, provided the following rules are consistently applied to all derivatives in all periods:
  • A derivative whose fair value is a net liability is classified in total as current.
  • A derivative whose fair value is a net asset and whose current portion is an asset is classified in total as noncurrent. (If the current portion is a liability, it should be presented as a current liability.)
Example FSP 19-1and Example FSP 19-2 illustrate presentation of a derivative in a classified balance sheet.
EXAMPLE FSP 19-1

Balance sheet classification of a derivative that is a net liability
On January 1, 20X1, DH Corp enters into a forward contract with Counterparty B that requires DH Corp to acquire specified volumes of a commodity, which will be delivered on December 31, 20X2 and December 31, 20X3. The contract does not allow either party to terminate the contract prior to maturity. There is no master netting agreement in place with Counterparty B. At inception, the forward contract has a fair value of zero, and DH Corp accounts for it as a derivative.
On December 31, 20X1, the derivative contract is in a $100 unrealized loss position from DH Corp’s perspective (i.e., it is a liability). Based on DH Corp’s analysis of the expected cash flows, approximately $40 of the unrealized loss position relates to commodities to be delivered on December 31, 20X2, and the final delivery will be on December 31, 20X3.
How should DH Corp present this derivative in a classified balance sheet?
Analysis
As of December 31, 20X1, DH Corp may present the derivative in either of the following ways, provided the approach taken is applied consistently.
Separately present current and noncurrent portions
Current liability
Noncurrent liability
Derivative liability
$ 40
$ 60

Present entirely as a current liability
Current liability
Noncurrent liability
Derivative liability
$ 100
$ 0
View table

EXAMPLE FSP 19-2

Balance sheet classification of a derivative that is a net asset
On June 30, 20X1, DH Corp enters into an interest rate swap agreement with Counterparty C. The contract requires annual payments commencing on June 30, 20X2 for three years. The terms of the arrangement call for DH Corp to receive from Counterparty C payments based on LIBOR and pay to Counterparty C a fixed rate of interest.
On December 31, 20X1, the contract is in a $2 million unrealized gain position from DH Corp’s perspective (i.e., it is an asset). The unrealized gain is made up of the net present value of each of the three payments:
Payment date
Fair value
June 30, 20X2
($500,000)
June 30, 20X3
850,000
June 30, 20X4
1,650,000
Total
$2,000,000
View table

How should DH Corp present this derivative in its December 31, 20X1 classified balance sheet?
Analysis
At December 31, 20X1, DH Corp should present this derivative as follows:
Noncurrent asset
$2,500,000
Current liability
$(500,000)
View table

However, if the current portion of the derivative were an asset, DH Corp could have elected to (1) present the entire derivative as noncurrent or (2) separately present the components as current and noncurrent, as applicable.

19.3.2 Balance sheet offsetting of derivatives

As discussed more fully in FSP 2.4, certain assets and liabilities may be netted on the balance sheet. Generally, they should only be netted if they meet the conditions in ASC 210-20-45-1. Those conditions are:
  • The parties owe each other determinable amounts
  • The reporting party has the legal right to set off the amount owed with the amount owed by the other party
  • The reporting party intends to set off
  • The right of setoff is legally enforceable
However, ASC 815-10-45-5 provides an exception for derivatives to the criterion related to the intent to set off. Even if the reporting party does not intend to set off the gross amounts, ASC 815 allows netting if the derivatives are with the same counterparty and the reporting entity has the right to set off the amounts owed under the derivatives pursuant to a master netting arrangement that is legally enforceable.
Although the term “master netting arrangement” is not specifically defined, ASC 815-10-45-5 provides some insight into master netting arrangements.

Excerpt from ASC 815-10-45-5

A master netting arrangement exists if the reporting entity has multiple contracts, whether for the same type of derivative instrument or for different types of derivative instruments, with a single counterparty that are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract.

Legal analysis and judgment are required in determining whether a transaction is governed by a master netting arrangement or similar agreement and in determining the legal rights of the reporting entity/counterparty, as they may vary by contract and by jurisdiction. Determining the legal rights should include an analysis of the operation of the contract itself and the enforceability of right to set off. Reporting entities should consider all relevant laws, including state laws about the right to set off and restrictions in the US Bankruptcy Code, in determining whether rights to set off are enforceable. See ASC 210-20-45-8 through ASC 210-20-45-9 for further details.
If the conditions for offsetting are met, a reporting entity may elect to report the fair value of its derivatives on a net basis by counterparty in the balance sheet. The choice to offset or not is an accounting policy election. Reporting entities should disclose the policy and apply it consistently. If a reporting entity elects to offset fair value amounts recognized for derivatives, the entity must also offset the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral. See FSP 19.3.2.3 for further information on the offsetting of collateral.

19.3.2.1 Master netting arrangements: over-the-counter

The International Swaps and Derivatives Association, Inc. (ISDA) created a framework/contract for bilateral, over-the-counter derivative trading. This framework is commonly referred to as the “ISDA Master Agreement.” For each counterparty derivatives are traded with, a separate ISDA Master Agreement must be executed.
Typically, part of the ISDA Master Agreement specifies the terms that provide for the right of set off. This allows an entity to net the derivatives traded with the respective counterparty under certain circumstances (such as in the event of default), provided the ISDA Master Agreement is legally enforceable.

19.3.2.2 Master netting arrangements: centrally-cleared

Determining the appropriate presentation for centrally-cleared derivatives requires a legal analysis of the facts and the contractual rights. Reporting entities need to review transactions individually to see if netting provisions exist when evaluating their ability to net under ASC 210 and ASC 815.
The ability to net centrally-cleared derivatives requires the trade to flow through both the same clearing member and clearing house. We are not aware of instances when legal counsel has supported the netting of transactions that are traded through different clearing members, even if the trades ultimately clear through the same clearing house.
Question FSP 19-1
Should the carrying amount of the derivative that is used in a fair value hedge of an on-balance sheet item be added to the carrying amount of the hedged item, such as in a fair value hedge of a fixed-rate debt obligation with a pay-floating, receive-fixed interest rate swap? Said differently, should the change in the fair value of the interest rate swap be added to the carrying amount of a debt obligation?
PwC response
No. The derivative liability is not associated with the future cash obligations to the debt holders and, therefore, should not be presented on a combined basis. The balance for the derivative asset or liability should be separate from the presentation of the hedged item.

19.3.2.3 Offsetting collateral

A reporting entity is required to recognize amounts for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable). A reporting entity may offset fair value amounts recognized for derivatives and "fair value amounts" related to collateral arising from derivatives that are subject to a master netting agreement. For the collateral receivable or payable, ASC 815-10-45-5 indicates that "fair value amounts" include amounts that approximate fair value. This applies only to collateral and should not be analogized to other receivables and payables.
A reporting entity that reports its derivatives net should also offset its cash collateral asset or liability against the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement provided the amounts for collateral meet the criteria for offsetting. If the collateral does not meet the criteria for offsetting, the reporting entity should report its derivatives net but is not permitted to net the related fair value amounts with the cash collateral.
As a corollary, if the reporting entity does not report its derivatives on a net basis, it is precluded from netting the related fair value amounts with the cash collateral.
The reporting entity's choice to offset or not must be applied consistently.
Collateral versus settlement
As discussed in DH 1.3.3.1, the legal nature of payments on derivatives determines if they are payments for collateral or settlement payments. For example, for centrally-cleared derivatives, it is important to understand the legal form of the variation margin, whether it is deemed to be collateral or a settlement payment. If the variation margin is considered a settlement payment, the balance sheet offsetting rules are not applicable because variation margin payments (receipts) do not qualify to be reported as separate deposit assets and liability balances. In this instance, the derivative contract and variation margin are considered a single unit of account for balance sheet presentation because the payment is legally a settlement of a portion of an outstanding contract.
Question FSP 19-2
Futures exchanges require an initial margin deposit and maintenance of the margin as long as the contract is open. If the initial margin is in cash, should it be classified as part of the carrying amount of an item that is being hedged, or may it be netted against the derivative?
PwC response
The initial margin represents a current receivable from the broker and should not be included as part of the carrying amount of the hedged item.
However, initial margin may be netted against the fair value of the derivative if the requirements for netting of derivatives are met.

19.3.3 Presentation of hybrid financial instruments

A hybrid financial instrument includes a host contract and embedded features that may or may not need to be separately accounted for.

19.3.3.1 Presentation of embedded derivatives

ASC 815 requires reporting entities that have hybrid financial instruments with embedded derivative features meeting certain criteria to separately account for the embedded derivative feature and the host contract (see DH 4). Although this requires separate accounting, we do not believe this requires separate financial statement presentation.
For purposes of balance sheet presentation, we believe the embedded feature and host contract may be presented on a combined basis because the combined presentation is reflective of the overall cash flows for that instrument. However, when the host contract would be presented in equity or mezzanine equity, we generally believe the host contract and embedded derivative feature should be presented separately.

19.3.3.2 Hybrid financial instruments at fair value

A reporting entity may elect to measure a hybrid financial instrument that would otherwise be required to be separated and accounted for as a host contract and a separated derivative at fair value under a fair value option. An entity may also be required to measure a hybrid instrument at fair value when it cannot reliably identify and measure an embedded derivative that would otherwise need to be separated.
ASC 815-15-45-1 and ASC 825-10-45 each require these instruments to be presented on the balance sheet separate from assets and liabilities that are not measured at fair value. A reporting entity may (1) present separate line items for the fair value and non-fair value amounts or (2) present an aggregate amount and parenthetically disclose the amount at fair value included within the aggregate amount.

19.3.4 Basis adjustments for portfolio layer method hedges

This chapter assumes adoption of ASU 2022-01. There are specific balance sheet presentation requirements when entering into portfolio layer method hedges. For discussion of portfolio layer method hedges, refer to DH 6.5. As discussed in DH 6.5.3, basis adjustments for active portfolio layer method hedges are not allocated to the individual assets but are instead maintained against a closed portfolio of assets. In other fair value hedges, the basis adjustment is recorded at the individual asset or liability being hedged and becomes part of each individual asset’s amortized cost basis and must be taken into account when accounting for that individual asset, such as when determining a CECL allowance.
For portfolio layer method hedges, even though the basis adjustments are not allocated to individual assets, the basis adjustment is maintained on the closed portfolio of assets and therefore adjusts the carrying amount of the balance sheet line item in which the closed portfolio of assets is presented. If the closed portfolio of assets are available-for-sale debt securities, the basis adjustment will adjust the amount recorded in accumulated other comprehensive income, but will not adjust the fair value of the available for sale securities. If the assets included in the closed portfolio are presented in different balance sheet line items, the total basis adjustment should be allocated to the different financial statement lines in a systematic and rational method.
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