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Like business entities, NFPs report derivatives as assets or liabilities on the balance sheet, measured at fair value on an ongoing basis in accordance with ASC 815, Derivatives and hedging. The discussion in this section focuses on the incremental guidance provided in ASC 815 and ASC 954-815 for NFPs related to derivatives, including the use of hedge accounting. For a comprehensive discussion of accounting considerations related to derivatives, refer to PwC's Derivatives and hedging guide (DH).
Hedge accounting links derivative instruments with items or transactions whose changes in fair values or cash flows are expected to offset each other. ASC 815 segregates hedges into three categories – cash flow, fair value, and net investment. DH 5 provides helpful background on hedge accounting and how it works.
To qualify for hedge accounting, the hedged items or transactions and the hedging instruments must be eligible for hedging treatment. In addition, the hedging relationship must be highly effective in offsetting changes in fair values or cash flows, both at the hedge’s inception and on an ongoing basis thereafter. Hedge effectiveness must be evaluated and demonstrated at least quarterly, even if an entity only issues financial statements on an annual basis (as is the practice of most NFPs). Hedge accounting is allowed only if appropriate, contemporaneous documentation of both the initial election (at inception) and each periodic assessment of effectiveness is prepared.
Although ASC 815 provides a simplified hedge accounting approach as an accounting alternative for private companies, NFPs are not considered “private companies” and thus, cannot utilize the simplified hedge accounting alternative.
Many NFPs will enter into derivatives for purposes of hedging specific risks or transactions, but not designate them as hedges under the accounting literature. For example, an NFP might enter into a floating-to-fixed swap as a hedge of interest rate risk; however, unless it is an NFP HCO, it will be precluded from applying ASC 815’s cash flow hedge accounting provisions (see NP 11.8.2). Similarly, an NFP that enters into a fixed-to-floating swap might be unwilling to commit the time and resources that would be needed (initially and on an ongoing basis) to apply fair value hedge accounting. Such situations, which are common in the NFP sector, are referred to as “economic hedging.”
Recent standard-setting
The hedge accounting discussions in this section do not incorporate the amendments in ASU 2017-12, Targeted improvements to accounting for hedging activities. ASU 2017-12 aligns the hedge accounting model more closely with risk management practices and makes targeted improvements to simplify the application of hedge accounting guidance. Among other changes, it will provide NFPs that are not conduit bond obligors with extra time to complete some of the hedge documentation requirements as well as additional time for conducting the initial and subsequent hedge effective assessments.
The amendments also will permit additional flexibility in hedging interest rate risk in swaps (discussed in NP 11.8.1). To facilitate the accounting for interest rate swaps tied to fixed rate debt (fair value hedges), the ASU adds the SIFMA swap rate to the list of benchmark interest rates eligible for use in the short-cut method. Floating-to-fixed interest rate swaps that are cash flow hedges will no longer be required to hedge benchmark interest rates to be eligible for the shortcut method; instead, any contractually-specified rate can be used, including the SIFMA swap rate or rates that are set through an auction process. The ASU also provides more prescriptive guidance for displaying derivative gains and losses in financial statements. Additional information on the ASU’s amendments is provided throughout the DH guide.
For all NFPs (including conduit bond obligors with publicly-traded debt), the ASU will be effective for financial statements issued for fiscal years beginning after December 15, 2020 and for interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted.

11.8.1 Interest rate swaps

A common hedging strategy used by NFPs is to enter into an interest rate swap in connection with issuing municipal bonds. Most often, the objective of using an interest rate swap is that the combined cash flows of the derivative and the debt will effectively convert fixed rate debt to variable-rate debt or vice versa. Swaps can also be used to convert variable rate bonds from one interest rate to another (a basis swap), as discussed in DH 6.3.6.
If the NFP qualifies (and elects) to use hedge accounting for the swap, the accounting differs based on the type of hedge. An NFP HCO with floating rate debt that enters into a floating-to-fixed swap would account for it as a cash flow hedge (see ASC 815-30). If an NFP has fixed rate debt and enters into a fixed-to-floating swap to hedge the fair value of its debt (essentially the payoff value), it would account for the hedge as a fair value hedge (see ASC 815-25).
For certain plain-vanilla hedges of interest rate risk, a “shortcut method” allows an entity to assume that the hedge is perfectly effective without having to perform ASC 815’s quantitative effectiveness assessments either at inception or on an ongoing basis, significantly simplifying hedge accounting (see DH 9.4). “Interest rate risk” is defined as the risk of changes in the hedged item’s fair value or cash flows attributable to changes in a designated benchmark interest rate. Currently, ASC 815 identifies three designated benchmark interest rates as eligible for the shortcut method (US Treasury, LIBOR, or the Overnight Indexed Swap (OIS) rate).
Because of the widespread use of municipal bond financing in the NFP sector, many NFPs use swaps whose underlying is the SIFMA Municipal Swap Rate (a benchmark floating rate derived from interest rate resets on a selected group of municipal variable rate demand obligation issues). If the variable leg of a swap is indexed to the SIFMA rate, the hedging relationship cannot qualify for use of the shortcut method, because the SIFMA swap rate is not an eligible benchmark rate. Use of the shortcut method is also precluded when an entity hedges variable-rate debt whose interest rate is reset through an auction process (such as auction rate municipal securities). However, the amendments in ASU 2017-02 (discussed in NP 11.8) will permit use of the shortcut method for these rates.

11.8.2 Presentation of derivative gains and losses–NFPs other than HCOs

NFPs other than HCOs recognize the gain or loss on all derivative instruments, whether hedging or nonhedging, as changes in net assets in the period of change. The gains or losses are classified as changes in net assets without donor restrictions unless they are donor-restricted (as might be the case for certain investments in derivative instruments).
If the NFP qualifies for and uses fair value hedge accounting, the changes in the fair value of the hedged item are reported in the same line item as the changes in the fair value of the derivative, so that they effectively offset in whole or in part (see ASC 815-25-35-19). NFPs are not permitted to use cash flow hedge accounting because they do not report a standardized earnings measure (see ASC 815-30-15-2). Therefore, most NFPs will account for economic hedges of cash flows as nonhedging derivatives that are presented in accordance with ASC 815-10-35-3. However, we believe that NFPs that voluntarily report a performance measure that is identical to the earnings measure (performance indicator) reported by NFP HCOs may apply cash flow hedge accounting by analogy. See NP 11.8.3 for information on cash flow hedge accounting by NFP HCOs.

Excerpt from ASC 815-25-35-19

An entity that does not report earnings as a separate caption in a statement of financial performance (for example, a not-for-profit entity) shall recognize the gain or loss on a [fair value] hedging instrument as a change in net assets in the period of change… Entities that do not report earnings shall recognize the changes in the carrying amount of the hedged item pursuant to paragraphs 815-25-35-1 through 35-4 in a fair value hedge as a change in net assets in the period of change.

Excerpt from ASC 815-30-15-2

The guidance in [the cash flow hedges subtopic] does not apply to … entities that do not report earnings. Those entities are not permitted to use cash flow hedge accounting because they do not report earnings separately.

ASC 815-10-35-3

An entity that does not report earnings as a separate caption in a statement of financial performance (for example, a not-for-profit entity or a defined benefit pension plan) shall recognize the gain or loss on a nonhedging derivative instrument as a change in net assets in the period of change.

Although ASC 815 does not provide specific guidance on how gains and losses on nonhedging derivatives that do not use hedge accounting should be presented in the statement of activities, fair value changes generally would be shown in a single line item. Splitting gains and losses into more than one line item or "recycling" the gains and losses by recognizing them in multiple line items in different periods is generally not appropriate, as ASC 815 allows presentation within multiple line items only for the effective and ineffective portions of gains and losses related to derivatives that are designated and qualify for hedge accounting. We believe that an NFP that engages in economic hedging may make a policy election to display the entire change in fair value of the derivative in the same line as the hedged item or transaction (for example, in interest expense for an interest rate swap associated with debt) or alternatively, may reflect the change in another reasonable income statement line item. For additional information, see FSP 19.4.4. AAG-NFP 4.29 through AAG-NFP 4.37 discuss the classification and presentation of the gains and losses on swaps, as well as considerations for investments in derivative instruments.

11.8.3 Presentation of derivative gains and losses—NFP HCOs

NFP HCOs report changes in fair value of derivatives in the same manner as business entities, as required by ASC 954-815-25-2. That is, derivative gains and losses are included in or excluded from the performance indicator in the same manner as a business entity would include or exclude them from net income (i.e., report them in other comprehensive income).

ASC 954-815-25-2

Except as provided in paragraph 954-815-50-1, not-for-profit health care entities shall apply the provisions of Topic 815 (including the provisions pertaining to cash flow hedge accounting) in the same manner as for-profit entities. That is, the gain or loss items that affect a for-profit entity's income from continuing operations similarly shall affect the not-for-profit health care entity's performance indicator, and the gain or loss items that are excluded from a for-profit entity's income from continuing operations (such as items reported in other comprehensive income) similarly shall be excluded from the performance indicator by the not-for-profit health care entity.

For fair value hedges, the changes in the fair value of the derivative are reported in the same line item as the changes in the fair value of the hedged item and reported within the performance indicator.
Unlike other NFPs, NFP HCOs are permitted to use cash flow hedge accounting, which permits the effective portion of a derivative’s change in fair value to initially be reported outside of an earnings measure (the performance indicator), and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. See also ASC 954-220-45-8(e). The ineffective portion of the change in fair value remains within the performance indicator. As discussed in ASC 954-815-45-1, the fact that NFP HCOs are not required to report accumulated other comprehensive income (or changes therein) as a separate component of equity in the balance sheet pursuant to ASC 220 is not a barrier to their use of cash flow hedge accounting.

ASC 954-815-45-1

The absence of a requirement to report a separate component of equity in the balance sheet of a not-for-profit, business-oriented health care entity shall not preclude those entities from using comprehensive income reporting for qualifying gains and losses on cash flow hedges. Although accumulated other comprehensive income will inherently be carried forward in a not-for-profit health care entity's net assets, there is no compelling need for it to be reported separately in the balance sheet.

However, ASC 954-815-50 requires NFP HCOs to provide cash flow hedging disclosures that are analogous to those required for business entities, including disclosure of amounts that have been excluded from the performance indicator.
If the NFP HCO does not qualify for or does not elect to use hedge accounting, or if it enters into a nonhedging derivative for purposes other than risk management, the changes in fair value are included within the performance indicator unless they pertain to donor-restricted activity.
AAG-HCO Chapter 5, Derivatives, provides additional discussion on these matters.

11.8.4 NFP tabular disclosure requirements of derivatives

ASC 815 requires that certain derivative disclosures be provided in a tabular format, with specific considerations for NFPs discussed at ASC 815-10-50-4G.

ASC 815-10-50-4G

For purposes of the disclosure requirements beginning in paragraph 815-10-50-4A, not-for-profit entities within the scope of Topic 954 should present a similarly formatted table. Those entities shall refer to amounts within their performance indicator, instead of in income, and amounts outside their performance indicator, instead of in other comprehensive income. Not-for-profit entities not within the scope of Topic 954 shall disclose the gain or loss recognized in changes in net assets using a similar format. All not-for-profit entities also would indicate which class or classes of net assets (without donor restrictions or with donor restrictions) are affected.

NFPs must include the location and amounts of gains and losses reported in the statement of activities (or for NFP HCOs, in the statement of operations, identifying the amount of gains and losses recognized in the performance indicator and, where applicable, outside the performance indicator). This disclosure requires separate categories for derivatives designated and qualifying as fair value hedges, those designated and qualifying as cash flow hedges, those not designated or not qualifying as hedging instruments, and other categories, if applicable. Within each category, separate line items should further categorize derivatives by purpose (i.e., the item being hedged, or the exposure created). NFPs also must disclose which class or classes of net assets (without donor restrictions or with donor restrictions) are affected.
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