1.1 Overview

ASC 815 is the source of authoritative literature in U.S. GAAP on derivatives and hedging. The main principles of ASC 815 were derived from FASB Statement 133, which established comprehensive accounting and reporting requirements for derivatives (as defined in the standard) and qualifying hedging activities. Shortly after the issuance of Statement 133 in June 1998, the FASB established a Derivatives Implementation Group (DIG) to provide interpretive guidance, which became authoritative once formally cleared by the FASB. The FASB issued more than 130 DIG Issues (excluding transition issues). When the FASB Accounting Standards Codification (the “Codification”) was released in 2009, ASC 815 became the primary home of the collective guidance.

ASC 815-10

05-1 The Derivatives and Hedging Topic includes the following Subtopics:

Overall
Embedded Derivatives
Hedging — General
Fair Value Hedges
Cash Flow Hedges
Net Investment Hedges
Contracts in Entity’s Own Equity
Weather Derivatives.

05-2 The first six Subtopics address the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The last two Subtopics provide guidance on accounting for contracts that have characteristics of derivative instruments but that are not accounted for as derivative instruments under this Subtopic.

05-4 This Topic requires that an entity recognize derivative instruments, including certain derivative instruments embedded in other contracts, as assets or liabilities in the statement of financial position and measure them at fair value. If certain conditions are met, an entity may elect, under this Topic, to designate a derivative instrument in any one of the following ways:

A hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, that are attributable to a particular risk (referred to as a fair value hedge)
A hedge of the exposure to variability in the cash flows of a recognized asset or liability, or of a forecasted transaction, that is attributable to a particular risk (referred to as a cash flow hedge)
A hedge of the foreign currency exposure of any one of the following:
1. An unrecognized firm commitment (a foreign currency fair value hedge)
2. An available-for-sale debt security (a foreign currency fair value hedge)
3. A forecasted transaction (a foreign currency cash flow hedge)
4. A net investment in a foreign operation.

10-1 Four fundamental decisions serve as cornerstones underlying the guidance in this Topic:

Derivative instruments represent rights or obligations that meet the definitions of assets or liabilities and should be reported in financial statements.
Fair value is the most relevant measure for financial instruments and the only relevant measure for derivative instruments. Derivative instruments should be measured at fair value, and adjustments to the carrying amount of hedged items should reflect changes in their fair value (that is, gains or losses) that are attributable to the risk being hedged and that arise while the hedge is in effect.
Only items that are assets or liabilities should be reported as such in financial statements.
Special accounting for items designated as being hedged should be provided only for qualifying items. One aspect of qualification should be an assessment of the expectation of effective offsetting changes in fair values or cash flows during the term of the hedge for the risk being hedged.

ASC 815 establishes the accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities.1 A foundational principle of ASC 815 is that an entity should recognize derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Fair value is the most relevant measure for derivative contracts.

If certain conditions are met, ASC 815 allows an entity to designate a derivative in a specialized hedge accounting relationship. The accounting for changes in a derivative’s fair value (i.e., gains and losses) depends on the intended use of the derivative and the resulting designation.2 For a derivative that is not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change unless the derivative qualifies for a scope exception under ASC 815.

Footnotes

See Deloitte’s Roadmaps Hedge Accounting and Contracts on an Entity’s Own Equity for authoritative and interpretive guidance on these topics. The guidance within this Roadmap is related to other ASC 815 matters.

See Deloitte’s Roadmap Hedge Accounting for more information about the different types of hedging arrangements and the resulting accounting consequences.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.