For cash flow hedges in which the forecasted transaction is probable of not occurring, ASC 815 does not provide guidance on the income statement presentation of amounts reclassified from accumulated other comprehensive income (AOCI) to earnings.

For qualifying net investment hedges, reporting entities are required to present amounts reclassified from AOCI to earnings in the same income statement line item that is used to present the earnings effect of the hedged net investment (e.g., gain on sale of subsidiary).

As for fair value and cash flow hedges, splitting gains and losses into more than one income statement line item or “recycling” the gains and losses by recognizing them in different line items in different periods is generally not appropriate for net investment hedges.

ASC 815 does not prescribe how to present excluded components in net investment hedges.

ASC 815 does not provide specific guidance on the income statement presentation of gains and losses of derivatives that are not designated in a hedging relationship. Reporting entities may use derivatives for risk management purposes, but not designate them as hedges under the accounting literature. Some view these derivatives as “economic hedges” and believe they should follow similar income statement presentation as derivatives used in qualifying accounting hedges.

We believe a reporting entity may make a policy election regarding the income statement classification of derivatives that are economic hedges. A reporting entity may either report the fair value fluctuations associated with the derivative (1) in the same line as the hedged item or (2) in another reasonable income statement line item. For example, assume a reporting entity earns revenue in a currency other than its functional currency and executes a foreign currency derivative to hedge that exposure. Although it represents an economic hedge, the reporting entity chooses not to designate this derivative as a hedge under ASC 815. The reporting entity may elect to either report the changes in fair value associated with the derivative in the revenue line or in the income statement with other derivatives not designated in hedging relationships. We believe either is acceptable as long as the policy decision is reasonable, applied consistently, and disclosed.

Splitting gains and losses into more than one income statement line item or “recycling” the gains and losses by recognizing them in different line items in different periods is generally not appropriate.

How should the issuer classify the dividend-equivalent payments to the warrant holder in its income statement?

The warrant holder’s right to dividend-equivalent distributions impacts the fair value of the warrant and should be included in determining the change in fair value of the warrant, which is recorded through the income statement. The payment in cash for the actual dividend reduces the recorded amount of the warrant on the balance sheet, representing a partial settlement of the warrant liability and therefore does not impact the income statement. Recognizing settlement payments in one income statement line with an offsetting change in fair value in another income statement line is generally not appropriate.

We believe the gain/loss can be presented in the same income statement line item as the economically hedged item or in a separate line item, such as “other income/expense.” If the reporting entity took the former approach, the gains or losses on the two derivatives would be reported in different line items of the income statement. Gains or losses on the swap would be recognized in the “interest income” line item, while the gains or losses on the cap would be recognized in the “interest expense” line item. If the reporting entity took the latter approach, it would recognize the gains or losses on both derivatives in the “other income/expense” line of the income statement.

Whichever approach the reporting entity selects should be applied consistently. In addition, when derivatives are used as economic hedges of assets or liabilities, the reporting entity should disclose the purpose of the derivative activity and its accounting policy for the derivatives, including where the gains or losses are presented in the income statement and the amounts for each period.

The accounting guidance does not define “unrealized” or “realized” for the purposes of income statement presentation. An investment company may elect an accounting policy to present changes in the fair value of a centrally-cleared derivative (including futures) in which variation margin payments are considered settlements as an unrealized or realized gain or loss. Investment companies must apply this policy decision consistently. However, investment companies should ensure that their disclosures are transparent with respect to how derivatives are presented in the financial statements.