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 19-1Balance 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:
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.