3.1 Overview

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:

1. 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)
2. 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)
3. 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.

A key underlying principle of ASC 815 is that derivatives represent either assets or liabilities in the statement of financial position, and those assets or liabilities should be measured at fair value. The accounting for changes in a derivative’s fair value (i.e., the gains and losses derived from those changes) depends on the intended use of the derivative and the resulting designation.1