7.3 Income Statement
ASC 815-10
45-8
Except for the guidance in the following paragraph and
paragraph 815-10-45-10, this Subtopic does not provide
guidance about the classification in the income statement of
a derivative instrument’s gains or losses, including the
adjustment to fair value for a contract that newly meets the
definition of a derivative instrument.
Derivative Instruments Held for Trading
Purposes
45-9
Gains and losses (realized and unrealized) on all derivative
instruments within the scope of this Subtopic shall be shown
net when recognized in the income statement, whether or not
settled physically, if the derivative instruments are held
for trading purposes. On an ongoing basis, reclassifications
into and out of trading shall be rare.
Options Granted to Employees and
Nonemployees
45-10
Subsequent changes in the fair value of an option that was
granted to a grantee and is subject to or became subject to
this Subtopic shall be included in the determination of net
income. (See paragraphs 815-10-55-46 through 55-48A and
815-10-55-54 through 55-55 for discussion of such an
option.) Changes in fair value of the option award before
vesting shall be characterized as compensation cost in the
grantor’s income statement. Changes in fair value of the
option award after vesting may be reflected elsewhere in the
grantor’s income statement.
As discussed in Chapter 3, changes in the fair
value of derivative assets and liabilities are typically recorded as gains and
losses in the income statement. ASC 815 is silent on classification in the income
statement of gains and losses related to derivatives that are not in qualifying
hedging relationships. Consequently, there is diversity in practice regarding the
presentation of such results.
Although income statement geography is not prescribed by ASC 815, the standard is
clear that gains and losses on all derivative instruments that are not in hedging
relationships (i.e., not in either qualifying hedges or economic hedges) must be
shown net when recognized on the income statement. See Section 6.3 of Deloitte’s Roadmap Hedge Accounting for further discussion of the income
statement classification of gains and losses of derivatives in both qualifying and
economic hedging relationships.
We further understand that in the SEC staff’s view, if a derivative does not qualify
for hedge accounting, an entity should record all income, expenses, and fair value
changes related to that derivative (whether realized or unrealized) in one line item
in the financial statements, and this line item should not change. For example, a
realized gain or loss recognized for a nonhedging derivative should be recorded in
the same income statement line item as any unrealized gains or losses previously
recognized for that instrument.
In a speech at the 2003 AICPA Conference on Current SEC
Developments, Gregory Faucette, then a professional accounting fellow in the OCA,
made extensive comments on the income statement classification of derivatives. Mr.
Faucette indicated that it would be inappropriate for an entity to present gains and
losses on a nonhedging derivative under multiple captions in its income statement.
For example, an entity should not classify separately the unrealized gains and
losses on an economic derivative under the caption “risk management activities”
while classifying realized gains and losses on the same derivative (e.g., periodic
or final cash settlements) in a separate revenue or expense line item that may be
associated with the underlying in the economic hedge.