Chapter 3 — Recognition and Measurement of Freestanding Derivatives

3.3 Subsequent Measurement

ASC 815-10

35-1 All derivative instruments shall be measured subsequently at fair value.

35-2 The accounting for changes in the fair value (that is, gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. Subtopic 815-20 discusses the accounting for the gain or loss on a derivative instrument that is designated as a hedging instrument. Except as noted in the following paragraph, the gain or loss on a derivative instrument not designated as a hedging instrument shall be recognized currently in earnings.

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 [NFP] 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.

Entities may enter into derivative contracts to hedge their exposure to various economic risks as part of their risk management strategy. If certain criteria are met, ASC 815 permits them to designate such derivatives in a qualified hedging relationship, which affects the accounting for the associated hedging instrument and hedged item. When hedge accounting is applied, entities may not need to immediately recognize the gain or loss associated with the change in the derivatives’ fair value. See Deloitte’s Roadmap Hedge Accounting for a thorough discussion of the application of hedge accounting.

Derivatives that are not designated in a qualified hedging relationship are accounted for at fair value, with changes in fair value recognized in earnings. Because of the nature and complexity of such instruments, entities often need to engage valuation specialists to determine the fair value of their derivative contracts.2

As indicated in ASC 815-10-35-3, “[a]n entity that does not report earnings as a separate caption in a statement of financial performance [should] recognize the gain or loss on a nonhedging derivative instrument as a change in net assets in the period of change.”

Footnotes

See Section 6.3.2 of Deloitte’s Roadmap Hedge Accounting for discussion of the income statement classification of gains and losses related to derivatives that represent an economic hedge but are not in qualifying hedge relationships.

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