Chapter 7 — Presentation and Disclosures

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.

7.5 Disclosures

The disclosure requirements of ASC 815 apply to all interim and annual reporting periods for which a balance sheet and income statement are presented.

ASC 815-10

50-4I If information on derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) is disclosed in more than a single note to financial statements, an entity shall cross-reference from the derivative instruments (or nonderivative instruments) note to other notes in which derivative-instrument-related information is disclosed.

Disclosures about derivatives and hedging activities are not required to be presented in a single footnote to the financial statements. However, ASC 815-10-50-4I notes that if the disclosures required by ASC 815-10-50 are made in more than one footnote, an entity should provide a cross-reference from the footnote regarding the derivative instruments (or nonderivative hedging instruments) to the other notes in which information about derivatives and hedging activities is disclosed. For information about the disclosure requirements related to fair value measurements, see Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option).

7.5.1 Qualitative Disclosures About Objectives of Derivatives

ASC 815-10

General

50-1 An entity with derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose information to enable users of the financial statements to understand all of the following:

How and why an entity uses derivative instruments (or such nonderivative instruments)
How derivative instruments (or such nonderivative instruments) and related hedged items are accounted for under Topic 815
How derivative instruments (or such nonderivative instruments) and related hedged items affect all of the following:
1. An entity’s financial position
2. An entity’s financial performance
3. An entity’s cash flows.

50-1A An entity that holds or issues derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose all of the following for every annual and interim reporting period for which a statement of financial position and statement of financial performance are presented:

Its objectives for holding or issuing those instruments
The context needed to understand those objectives
Its strategies for achieving those objectives
Information that would enable users of its financial statements to understand the volume of its activity in those instruments.

50-1B For item (d) in paragraph 815-10-50-1A, an entity shall select the format and the specifics of disclosures relating to its volume of such activity that are most relevant and practicable for its individual facts and circumstances. Information about the instruments in items (a) through (c) in paragraph 815-10-50-1A shall be disclosed in the context of each instrument’s primary underlying risk exposure (for example, interest rate, credit, foreign exchange rate, interest rate and foreign exchange rate, or overall price). Further, those instruments shall be distinguished between those used for risk management purposes and those used for other purposes. Derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) used for risk management purposes include those designated as hedging instruments under Subtopic 815-20 as well as those used as economic hedges and for other purposes related to the entity’s risk exposures.

50-2 The instruments addressed by items (a) through (c) in paragraph 815-10-50-1A shall be distinguished between each of the following:

Derivative instruments (and nonderivative instruments as noted in items (1)(i) and (1)(iii) of this paragraph) used for risk management purposes, distinguished between each of the following:
1. Derivative instruments (and nonderivative instruments) designated as hedging instruments, distinguished between each of the following:
  1. Derivative instruments (and nonderivative instruments) designated as fair value hedging instruments
  2. Derivative instruments designated as cash flow hedging instruments
  3. Derivative instruments (and nonderivative instruments) designated as hedging instruments for hedges of the foreign currency exposure of a net investment in a foreign operation.
2. Derivative instruments used as economic hedges and for other purposes related to the entity’s risk exposures.
Derivative instruments used for other purposes.

50-4 For derivative instruments not designated as hedging instruments under Subtopic 815-20, the description shall indicate the purpose of the derivative activity.

50-5 Qualitative disclosures about an entity’s objectives and strategies for using derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) may be more meaningful if such objectives and strategies are described in the context of an entity’s overall risk exposures relating to all of the following:

Interest rate risk
Foreign exchange risk
Commodity price risk
Credit risk
Equity price risk.

Those additional qualitative disclosures, if made, should include a discussion of those exposures even though the entity does not manage some of those exposures by using derivative instruments. An entity is encouraged, but not required, to provide such additional qualitative disclosures about those risks and how they are managed.

50-5A The quantitative disclosures about derivative instruments may be more useful, and less likely to be perceived to be out of context or otherwise misunderstood, if similar information is disclosed about other financial instruments or nonfinancial assets and liabilities to which the derivative instruments are related by activity. Accordingly, in those situations, an entity is encouraged, but not required, to present a more complete picture of its activities by disclosing that information.

An entity with derivatives should disclose sufficient information to enable financial statement users to understand how and why it uses derivatives in the context of its operations.

ASC 815-10-50-1 requires disclosures about the following:

How and why an entity uses derivative instruments . . .
How derivative instruments . . . are accounted for under Topic 815
How derivative instruments . . . affect all of the following:
1. An entity’s financial position [i.e., balance sheet]
2. An entity’s financial performance [i.e., comprehensive income statements]
3. An entity’s cash flows [i.e., cash flow statement].

In addition, ASC 815-10-50-1A requires an entity to describe in the footnotes the objectives, context, and strategies for holding or issuing derivatives. ASC 815-10-50-1B clarifies that this discussion should be “in the context of each instrument’s primary underlying risk exposure (for example, interest rate, credit, foreign exchange rate, interest rate and foreign exchange rate, or overall price).” Such disclosures should be broken down further between those used for “risk management purposes” and those used for other purposes. According to ASC 815-10-50-1B, instruments used for risk management purposes include both those designated in qualifying hedging relationships and “those used as economic hedges and for other purposes related to the entity’s risk exposures.” For specific discussion of disclosures applicable to derivatives (and nonderivatives) involved in hedging activities, see Deloitte’s Roadmap Hedge Accounting.

ASC 815-10-50-4 requires an entity to describe the purpose of any activities involving derivatives that are not designated in qualifying hedging relationships. SEC registrants should be mindful that if any metrics are reported related to economic hedging or other general risk management activities, they must consider the guidance in the SEC’s non-GAAP measure rules when making any adjustments. For further discussion of non-GAAP measures, see Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics.

7.5.2 Overall Quantitative Disclosures

ASC 815-10

50-4A An entity that holds or issues derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose all of the following for every annual and interim reporting period for which a statement of financial position and statement of financial performance are presented:

The location and fair value amounts of derivative instruments (and such nonderivative instruments) reported in the statement of financial position
The location and amount of the gains and losses on derivative instruments (and such nonderivative instruments) and related hedged items reported in any of the following:
1. The statement of financial performance
2. The statement of financial position (for example, gains and losses initially recognized in other comprehensive income).
The total amount of each income and expense line item presented in the statement of financial performance in which the results of fair value or cash flow hedges are recorded.

50-4E The quantitative disclosures required by paragraphs 815-10-50-4A through 50-4CCC shall be presented in tabular format. If a proportion of a derivative instrument is designated and qualifying as a hedging instrument and a proportion is not designated and qualifying as a hedging instrument, an entity shall allocate the related amounts to the appropriate categories within the disclosure tables. Example 21 (see paragraph 815-10-55-182) illustrates the disclosures described in paragraphs 815-10-50-4A through 50-4E.

ASC 815-10-50-4A establishes overall requirements for quantitative disclosures related to the impact of derivatives (and nonderivative hedging instruments) on an entity’s balance sheet, income statement, and statement of OCI. Each of these requirements is discussed in further detail in the next sections.

ASC 815-10-50-4E notes that the quantitative disclosures required in ASC 815-10-50-4A through 50-4CCC must “be presented in tabular format.” Many of the quantitative disclosures required by ASC 815 require entities to separate the presentation of derivatives designated in qualifying hedging relationships from the presentation of those that are not in qualifying hedging relationships. According to ASC 815-10-50-4E, “[i]f a proportion of a derivative instrument is designated and qualifying as a hedging instrument and a proportion is not designated and qualifying as a hedging instrument, an entity shall allocate the related amounts to the appropriate categories within the disclosure tables.” See Examples 6-5 and 6-6 in Deloitte’s Roadmap Hedge Accounting.

7.5.2.1 Quantitative Disclosures Related to the Balance Sheet

ASC 815-10

The location and fair value amounts of derivative instruments (and such nonderivative instruments) reported in the statement of financial position . . . .

50-4B The disclosures required by item (a) in the preceding paragraph shall comply with all of the following:

The fair value of derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall be presented on a gross basis, even when those instruments are subject to master netting arrangements and qualify for net presentation in the statement of financial position in accordance with Subtopic 210-20 or paragraphs 815-10-45-5 through 45-7, as applicable.
Cash collateral payables and receivables associated with those instruments shall not be added to or netted against the fair value amounts.
Fair value amounts shall be presented as separate asset and liability values segregated between each of the following:
1. Those instruments designated and qualifying as hedging instruments under Subtopic 815-20, presented separately by type of contract (for example, interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts, other contracts, and so forth)
2. Those instruments not designated as hedging instruments, presented separately by type of contract.
The disclosure shall identify the line item(s) in the statement of financial position in which the fair value amounts for these categories of derivative instruments are included.

Amounts required to be reported for nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66 shall be the carrying value of the nonderivative hedging instrument, which includes the adjustment for the foreign currency transaction gain or loss on that instrument.

ASC 815-10-50-4A(a) requires an entity to provide a tabular disclosure of the location and fair value of derivative instruments and nonderivative hedging instruments reported on the balance sheet. ASC 815-10-50-40B provides more details on how to comply with ASC 815-10-50-4A(a) by clarifying the following items:

The fair value of derivatives and nonderivative hedging instruments should “be presented on a gross basis,” even if those amounts are offset with other derivative instruments in accordance with ASC 210-20.
Payables and receivables related to cash collateral associated with derivatives should “not be added to or netted against the fair value amounts.”
Assets and liabilities should be presented separately, and the fair value amounts should be segregated between the following:
- Instruments that are designated in qualifying hedging relationships, “presented separately by type of contract (for example, interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts, other contracts, and so forth).”
- Instruments that are not designated as hedging contracts, “presented separately by type of contract” (see above).
The disclosure should “identify the line item(s)” on the balance sheet in which the derivatives are included for each of these categories.
For nonderivative hedging instruments included in the tabular disclosures, entities should report the carrying value of the nonderivative instrument in accordance with ASC 830.

ASC 815-10-55-182 provides an illustrative example of the tabular disclosures required by ASC 815-10-50-4A. The portion of the illustration related to the balance sheet (as required by ASC 815-10-50-4A(a)) is reproduced below.

ASC 815-10

55-182 This Example illustrates the disclosure in tabular format of fair value amounts of derivative instruments and gains and losses on derivative instruments as required by paragraphs 815-10-50-4A through 50-4E:

. . .

7.5.2.1.1 Tabular Disclosure of Amounts That Are Offset in Accordance With ASC 210

If an entity elects to offset its derivative assets and liabilities in accordance with ASC 815-10-45-1 through 45-7 and ASC 210-20-45-1 through 45-5, it presents those derivative assets and liabilities on a net basis in the statement of financial position. As noted above, ASC 815-10-50-4B(a) requires entities to separately disclose the fair value of all derivative assets and liabilities on a gross basis, “even when [the derivative] instruments are subject to master netting arrangements and qualify for net presentation in the statement of financial position in accordance with Subtopic 210-20.” Accordingly, an entity may be required to show on the balance sheet (1) gross derivative asset balances that are reported as “contra” liabilities and (2) gross derivative liability balances that are included as “contra” assets.

Example 7-3

Derivatives Subject to Offset — Balance Sheet Line Item for Tabular Disclosure

Assume that TreyCo (1) has a portfolio of derivatives containing contracts that are in both asset and liability positions as of the reporting date and (2) has appropriately elected, in accordance with ASC 210-20, to present those contracts net in its statement of financial position as net liabilities within the line item for “derivative liabilities.” TreyCo must still present the gross derivative assets within that portfolio as “derivative liabilities” in the tabular disclosures. ASC 815-10-50-4B(d) requires such disclosures to “identify the line item(s) in the statement of financial position in which the fair value amounts for these categories of derivative instruments are included.”

In addition to providing the required disclosure identifying the “line item(s) in the statement of financial position in which the fair value amounts for these categories of derivative instruments are included,” an entity is permitted to provide supplemental disclosure regarding (1) the basis for its presentation in the tabular disclosures, (2) the nature of the relationship between the offsetting asset and liability derivative contracts, and (3) how those amounts are ultimately presented in the statement of financial position. (It is recommended that the entity provide such disclosure in a footnote to the table.)

The following is an example of what TreyCo could disclose to comply with requirements for the tabular disclosure of the fair values of derivative instruments in a statement of financial position, including disclosure of which instruments are subject to master netting arrangements and presented net in the statement of financial position:

7.5.2.1.2 Receivables or Payables Related to Cash Collateral From Derivatives

ASC 815-10-45-5 permits an entity to “offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) recognized at fair value executed with the same counterparty under a master netting arrangement.” ASC 815-10-45-6 notes that a “reporting entity shall not offset fair value amounts recognized for derivative instruments without offsetting fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral.” Moreover, ASC 815-10-50-4B(b) states that “[c]ash collateral payables and receivables associated with [the derivative] instruments shall not be added to or netted against the fair value amounts.”

Although an entity is not permitted to net collateral payables or receivables against the fair values of its derivatives in the tabular disclosures, ASC 815-10-50 does not prohibit an entity from providing supplemental disclosure in its tabular presentations. Therefore, an entity may indicate — by adding a footnote to its tabular disclosure or providing separate columnar presentation or another similar presentation — the fair values of its collateral payables or receivables that are (1) offset against the fair values of its derivative assets and liabilities and (2) presented net in its statement of financial position. The entity should consistently apply this presentation to all similar derivative contracts and relationships. Also, any supplemental disclosure should clearly indicate how the related amounts are presented in the statement of financial position.

7.5.2.1.3 Derivatives With a Portion Classified as Current and a Portion Classified as Noncurrent

An entity may classify a portion of a derivative contract as current and a portion as noncurrent in its classified balance sheet (see Section 7.2.2). Under ASC 815-10-50-4A(a) and ASC 815-10-50-4B, the entity is required to identify the location of the fair value amounts included in the statement of financial position. Therefore, in the tabular disclosures required by those paragraphs, the entity should separately present the fair value amounts of the derivative that are related to (1) the portion classified as current and (2) the portion classified as noncurrent.

7.5.2.2 Trading Derivatives

ASC 815-10

50-4F For derivative instruments that are not designated or qualifying as hedging instruments under Subtopic 815-20, if an entity’s policy is to include those derivative instruments in its trading activities (for example, as part of its trading portfolio that includes both derivative instruments and nonderivative or cash instruments), the entity can elect to not separately disclose gains and losses as required by paragraph 815-10-50-4CC provided that the entity discloses all of the following:

The gains and losses on its trading activities (including both derivative instruments and nonderivative instruments) recognized in the statement of financial performance, separately by major types of items, for example:
1. Fixed income/interest rates
2. Foreign exchange
3. Equity
4. Commodity
5. Credit.
The line items in the statement of financial performance in which trading activities gains and losses are included
A description of the nature of its trading activities and related risks, and how the entity manages those risks.

If the disclosure option in this paragraph is elected, the entity shall include a footnote in the required tables referencing the use of alternative disclosures for trading activities. Example 21 (see paragraph 815-10-55-182) illustrates a footnote referencing the use of alternative disclosures for trading activities. Example 22 (see paragraph 815-10-55-184) illustrates the disclosure of the information required in items (a) and (b).

If an entity has a policy of including derivative instruments that are not in qualifying hedging relationships in its trading activities, it may elect to exclude such “trading derivatives” from its tabular disclosures about gains and losses required by ASC 815-10-50-4CC. However, if the entity elects to exclude trading derivatives, it should:

Include a footnote in the tabular disclosures that references this election for trading activities.
Present a description of (1) its trading activities and related risks and (2) how the entity manages those risks.
Disclose the gains and losses on its trading activities (including both derivatives and nonderivatives) separately by major types of items. ASC 815-10-50-4F provides the following examples of major types of items:
1. Fixed income/interest rates
2. Foreign exchange
3. Equity
4. Commodity
5. Credit.

However, if the derivative instruments are not held for trading purposes, an entity may not elect to exclude such instruments from the tabular disclosures required by ASC 815-10-50-4CC solely because they are not designated in qualifying hedging relationships. For an entity to elect to provide alternative disclosures for trading derivatives, its use of the derivatives must meet the definition of trading in U.S. GAAP. The ASC master glossary defines trading as follows:

An activity involving securities sold in the near term and held for only a short period of time. The term trading contemplates a holding period generally measured in hours and days rather than months or years. See paragraph 948-310-40-1 for clarification of the term trading for a mortgage banking entity.

Example 22 in ASC 815-10-55-184, which is reproduced below, provides an illustration of quantitative disclosures related to trading activities.

ASC 815-10

55-184 This Example illustrates one approach for presenting the quantitative information required under paragraph 815-10-50-4F when an entity elects the alternative disclosure for gains and losses on derivative instruments included in its trading activities. The Example does not address all possible ways of complying with the alternative disclosure requirements under that paragraph. Many entities already include the required information about their trading activities in other disclosures within the financial statements. Paragraph 815-10-50-4I states that, if information on derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) is disclosed in more than a single note to financial statements, an entity shall cross-reference from the derivative instruments (or nonderivative instruments) note to other notes in which derivative-instrument-related information is disclosed.

The revenue related to each category includes realized and unrealized gains and losses on both derivative instruments and nonderivative instruments.

7.5.2.3 Not-for-Profit Entities

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.

Under ASC 815-10-50-4G, NFPs within the scope of ASC 954 are required to present tabular disclosures related to the impact of derivatives and hedging activities in tables that are formatted similarly to those discussed above, even if those entities do not present statements of income and OCI. In such disclosures, the term “income” should be replaced by the entity’s “performance indicator” and the term “other comprehensive income” should be replaced by “outside [of the] performance indicator.”

If an NFP is not within the scope of ASC 954, it should present the gain or loss recognized in changes in net assets in a similar format and indicate which class or classes of net assets are affected.

7.5.3 Liquidity Risk Disclosures

7.5.3.1 Credit-Risk-Related Contingent Features

ASC 815-10

50-4H An entity that holds or issues derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose all of the following for every annual and interim reporting period for which a statement of financial position is presented:

The existence and nature of credit-risk-related contingent features
The circumstances in which credit-risk-related contingent features could be triggered in derivative instruments (or such nonderivative instruments) that are in a net liability position at the end of the reporting period
The aggregate fair value amounts of derivative instruments (or such nonderivative instruments) that contain credit-risk-related contingent features that are in a net liability position at the end of the reporting period
The aggregate fair value of assets that are already posted as collateral at the end of the reporting period
The aggregate fair value of additional assets that would be required to be posted as collateral if the credit-risk-related contingent features were triggered at the end of the reporting period
The aggregate fair value of assets needed to settle the instrument immediately if the credit-risk-related contingent features were triggered at the end of the reporting period.

The annual and interim disclosures required by ASC 815-10-50-4H are designed to highlight liquidity risk associated with derivative liabilities that are not fully collateralized, particularly the potential for collateral calls or immediate settlement. The disclosures are focused on derivative liabilities because, as a result of triggering events, an entity may be required to deliver cash or other assets as collateral or to settle such contracts early. Some refer to the ASC 815-10-50-4H disclosures as “run on the bank” disclosures. More commonly, they are referred to as “liquidity risk disclosures.”

7.5.3.1.1 Identification of Net Derivative Liabilities Subject to Liquidity Risk Disclosures

Entities may find it useful to perform the steps below when determining which contracts are subject to the disclosure requirements in ASC 815-10-50-4H (note that steps 2 and 3 can be reversed if desired).

7.5.3.1.1.1 Step 1 — Identify All Derivative Liabilities Recognized at Fair Value

An entity performs this step on a gross basis at the contract level (i.e., it does not offset a liability against an asset in accordance with ASC 815-10-45-1 through 45-8 or other portfolio approach). The remaining population of contracts should be consistent with the derivative liabilities disclosed under ASC 815-10-50-4A and 50-4B.

7.5.3.1.1.2 Step 2 — Identify the Subset of Derivative Liabilities That Are Fully Collateralized

On the basis of discussions with the FASB staff, we understand that the scope of ASC 815-10-50-4H encompasses any derivative liabilities (with credit-risk-related contingent features) that (1) are accounted for at fair value under ASC 815 and (2) are not fully collateralized as of the balance sheet date and therefore represent a liquidity exposure to the entity. Note that a fully collateralized derivative, by contrast, represents a derivative liability (from the reporting entity’s perspective) for which the reporting entity has posted sufficient collateral as of the balance sheet date to avoid any additional payments upon an early settlement of the contract (for this purpose, early settlement is presumed to occur as of the balance sheet date on the basis of the derivative’s GAAP fair value unless the contract explicitly refers to another early settlement calculation). In other words, a derivative liability is considered fully collateralized only if it is effectively “prepaid” (through the collateral), which would eliminate any additional liquidity exposure to the entity as of the balance sheet date.

The term “collateral” refers to assets provided to, or legally restricted for the benefit of, a counterparty in support of an obligation; to be considered collateral for a derivative liability, the assets must be contractually linked to the derivative. Entities should not consider letters of credit (LCs) posted with the counterparty to be assets posted as collateral. In addition, when determining whether a derivative liability is fully collateralized, an entity should not consider (1) derivative assets recognized at fair value, (2) contracts subject to the NPNS scope exception in ASC 815-10-15-13, or (3) receivables or other items that are subject to the same master netting arrangement as the derivative liability. These amounts (whether related to open positions or receivables) arise on the basis of separate transactions between the parties, whereas collateral arises on the basis of terms and conditions within a specific contract or master netting arrangement.

When an entity is determining whether a derivative liability is fully collateralized, it is acceptable to adopt a consistent approach in which the entity defines collateral as cash (in the same currency as the derivative’s settlement) and thus only considers a derivative liability fully collateralized when it is fully collateralized with cash. This approach is consistent with the principle that the derivative liability must effectively be prepaid (with no additional liquidity exposure) as of the balance sheet date. Cash provided to a counterparty is different from other forms of collateral in that it carries no collection risk and is not subject to fluctuations in value (as opposed to land, for example).

Note that for derivative liquidity disclosures, entities should not think of “net” in the context of ASC 815-10-45-1 through 45-7 or ASC 210-20-45-1 through 45-53 (see Section 7.2.1). The meaning of the term “net liability position,” as used in the ASC 815-10-50-4H disclosure requirements, differs from how a net derivative asset or liability may be determined under ASC 815-10-45-1 through 45-7 and ASC 210-20-45-1 through 45-5. More specifically, under a master netting arrangement with a single counterparty, an entity may have both derivative asset and derivative liability contracts that, upon satisfaction of the criteria in ASC 815-10-45-1 through 45-7 and ASC 210-20-45-1 through 45-5, may be offset and presented as a single net asset in the entity’s balance sheet. Despite presentation as a net asset, however, each individual derivative liability within that master netting arrangement that has a credit-risk-related contingent feature would be subject to the ASC 815-10-50-4H disclosures unless the liability was fully collateralized.

Example 7-4

Derivative Not Fully Collateralized

Mercury Provisions has a forward to purchase titanium that is a liability with a fair value of $100 as of the balance sheet date. It has posted collateral of $75, and if an early settlement occurs on the balance sheet date, it would be required to pay an additional $25 to the counterparty. In this example, the derivative is not fully collateralized because Mercury would need to make an additional payment upon early settlement.

After the contracts identified in step 2 are eliminated (i.e., step 1 population less step 2 subset), the remaining subset of derivative contracts represents all derivative instruments considered to be in a net liability position for the ASC 815-10-50-4H disclosures (i.e., derivative liability contracts that are not fully collateralized).

7.5.3.1.1.3 Step 3 — Identify Remaining Subset of Derivative Contracts Containing Credit-Risk-Related Contingent Features

From the remaining contracts (derivative instruments in a net liability position), the entity identifies the subset of derivative contracts that contains one or more credit-risk-related contingent features. When assessing whether individual features represent credit-risk-related contingent features that must be disclosed under ASC 815-10-50-4H, an entity should consider the following guidelines, which were developed on the basis of discussions with the FASB staff:

Disclosure is not limited to features that trigger cash payments. Although ASC 815-10-50-4H generally focuses on liquidity exposure, the guidance encompasses any feature that would require the use of an entity’s “assets.”
The feature could reside in a contract or governing arrangement (e.g., master netting arrangement). Many derivatives are executed under standard legal arrangements (e.g., ISDA agreements) that establish key terms and conditions and often provide for netting among the counterparties in certain situations. In such cases, the “master” arrangement typically serves as an umbrella governing each executed derivative, and it is therefore necessary to look to the master arrangement for contingent features. In these situations, the features within the master arrangement would be ascribed to the individual contracts covered by the arrangement. In other cases, a derivative contract may be a stand-alone legal instrument and any related contingent features would reside within the derivative contract itself.
The feature must be objective. More specifically, the feature must reference one or more specific contingent events and describe what the specific payment terms would be if the contingent event were to occur. For example, a feature requiring an entity to post $XX or XX percent of contract value with the counterparty if the entity’s credit rating drops below investment grade would be considered an objective feature. Material adverse-change clauses may or may not be objective. “General adequate assurance”1 clauses, which give each party in an arrangement the right to seek additional collateral if deemed necessary (but not on the basis of a specified credit event) are not considered objective, although entities are encouraged to provide supplemental disclosure about the existence of these types of provisions.
The feature should be directly related to credit events or measures of creditworthiness. Collateral requirements that are based solely on either (1) market indexes (e.g., interest rates or commodity prices) or (2) the fair value of a derivative or a portfolio would generally not be considered credit-risk-related contingent features since they are not driven by discrete credit events. Likewise, although many operational events affect credit, contingencies driven by operations generally are not considered credit-risk-related contingent features. Accordingly, events such as a decline in revenues or a loss of a major customer would not be considered credit-risk-related contingent features that must be disclosed under ASC 815-10-50-4H. However, contingencies that are based on an entity’s failure to maintain specified liquidity ratios (e.g., current ratios or quick ratios) or financial leverage ratios (e.g., debt ratios or debt-to-equity ratios) would generally be considered credit-risk-related contingent features.
Default provisions do not constitute credit-risk-related contingent features. Default provisions are triggered by an entity’s failure to perform under a particular contract. Contingent features, on the other hand, are generally related to factors or events that are external to the contract (e.g., a decline in a credit rating or a failure to maintain a minimum current ratio) and require incremental performance (e.g., posting of collateral) by one party or the other. Although some default events are ostensibly credit-driven, it is not necessary to identify credit-specific default provisions (e.g., payment delinquency or deficiency) and treat those events as credit-risk-related contingent features.
Cross-default provisions require special consideration. Unlike the default provisions discussed in guideline 5 above, cross-default provisions are related to factors that are external to an entity’s performance under the contract in question; accordingly, an entity must carefully consider the terms and conditions of such provisions to determine whether they are within the scope of ASC 815-10-50-4H. In some circumstances, a cross-default provision may constitute a credit-risk-related contingent feature (e.g., when a failure to make a required interest or principal payment on a debt instrument triggers a collateral call or early settlement of a derivative liability). In this case, the failure to make a required interest or principal payment could be viewed as a credit event. By contrast, a cross-default provision that is based on a failure to deliver goods under a commodity sales contract could be triggered by factors other than credit.
Bankruptcy and liquidation events do not constitute credit-risk-related contingent features.2 If payment is required only upon bankruptcy or final liquidation of the company, those features would not be considered credit-risk-related contingent features that must be disclosed under ASC 815-10-50-4H.

The examples below illustrate the application of the above guidelines to specific features that may exist in derivative contracts.

Features That Would Represent Credit-Risk-Related Contingent Features	Features That Would Not Represent Credit-Risk-Related Contingent Features
A requirement to post a discrete amount of collateral upon the occurrence of a credit rating downgrade. The discrete amount could be expressed as either a dollar amount or a percentage of the contract’s fair value.	A material adverse change clause that allows an entity to seek “performance assurance” in an amount determined in a commercially reasonable manner if and when the counterparty experiences a change in condition (financial or otherwise) that can be reasonably expected to impair the counterparty’s ability to fulfill its obligations.
A requirement to post a discrete amount of collateral if a defined financial leverage ratio (e.g., debt-to-equity ratio) falls below an established threshold. The discrete amount could be expressed as either a dollar amount or a percentage of the contract’s fair value.	A requirement to settle a contract immediately upon a company’s default under the contract in question. This would include any default event under the contract in question, including failure to pay when payment is due.
A requirement to settle a contract immediately upon the occurrence of a credit rating downgrade.	A requirement to settle a contract immediately upon the occurrence of a bankruptcy or liquidation event.
A requirement to settle a contract immediately if a defined financial leverage ratio (e.g., debt-to-equity ratio) falls below an established threshold.	A requirement to post a discrete amount of collateral if sales in a given quarter fall short of published projections.

7.5.3.1.1.4 Letters of Credit Are Not Collateral

The credit enhancement requirements in many derivatives can be satisfied by traditional collateral or standby LCs. A typical LC is issued by a financial institution and authorizes the beneficiary of the LC to draw specified amounts of cash upon the occurrence of a specified event (e.g., an event of default under the related derivative by the posting party). Some contractual arrangements require the posting of an LC with the counterparty at inception, while others provide for ongoing collateral requirements that can be satisfied by cash or LC and are triggered by events after inception (e.g., the credit rating is downgraded or the fair value exposure threshold is exceeded). In either case, the LC effectively represents a “guarantee” from the issuing financial institution of the payment obligations of the posting party. LCs represent a backstop mechanism in case the posting party cannot pay and, therefore, it is not necessarily expected that the LC beneficiary will ever draw upon the LC. If the LC beneficiary does draw upon the LC, the posting party has an obligation to repay the issuing financial institution; in other words, the posting party continues to have an obligation but the previous derivative obligation (to the derivative counterparty) is replaced with a debt obligation (to the issuing financial institution).

As described above, LCs are often provided or “posted” to derivative counterparties in lieu of collateral. Many entities negotiate LC facilities with financial institutions to provide ready access to LCs to support derivative transactions. Such facilities generally allow the entity to post LCs for the benefit of yet-to-be-identified derivative counterparties in amounts determined by the issuing entity and without incremental approval from the financial institution after inception. These facilities require commitment fees and function similarly to lines of credit in the sense that they establish a borrowing or “posting” cap and provide for the revolving use of available capacity under the arrangement for a defined period.

Although paragraph A44 of the Background Information and Basis for Conclusions of FASB Statement 161 refers to “immediate payment” requirements to a counterparty, the fundamental purpose of the disclosures is to highlight the liquidity risk associated with derivatives. Liquidity risk is not solely a function of immediate exposure; therefore, arrangements such as LCs that allow an entity to delay its payment obligations under a derivative do not remove the related derivatives from the scope of the ASC 815-10-50-4H credit risk disclosures.

The above guidance applies regardless of whether unused LC capacity creates the potential to use available LCs in lieu of collateral upon the occurrence of a credit-risk-related contingency. While available LCs do not affect the scope of the ASC 815-10-50-4H disclosures, entities are encouraged to describe their ability to use available capacity under LC facilities to satisfy collateral calls when preparing disclosures under ASC 815-10-50-4H(d)–(f), and it is important that entities highlight this ability so that they can properly portray their true liquidity exposure related to derivative liabilities. In connection with this disclosure, entities should (1) indicate the remaining borrowing or posting capacity under LC facilities, (2) describe the repayment terms if an LC is drawn by the derivative counterparty and an obligation to the issuing financial institution is created, and (3) consider the need to provide cross-references to other footnote disclosures, such as the debt footnote, in which LC information resides. In describing unused LC capacity, entities should consider any factors that would limit the use of such capacity to support derivative liabilities. Such factors may include contractual or legal restrictions, other financing needs, and management intent.

7.5.3.2 Liquidity Risk Disclosure Requirements

ASC 815-10

The existence and nature of credit-risk-related contingent features
The circumstances in which credit-risk-related contingent features could be triggered in derivative instruments (or such nonderivative instruments) that are in a net liability position at the end of the reporting period
The aggregate fair value amounts of derivative instruments (or such nonderivative instruments) that contain credit-risk-related contingent features that are in a net liability position at the end of the reporting period
The aggregate fair value of assets that are already posted as collateral at the end of the reporting period
The aggregate fair value of additional assets that would be required to be posted as collateral if the credit-risk-related contingent features were triggered at the end of the reporting period
The aggregate fair value of assets needed to settle the instrument immediately if the credit-risk-related contingent features were triggered at the end of the reporting period.

Once the population of derivative liabilities subject to the liquidity risk disclosures required in ASC 815-10-50-4H is identified (see Section 7.5.3.1.1), the preparation of the disclosure is largely an aggregation exercise. For example, the ASC 815-10-50-4H(a) and (b) disclosures would describe the different types of credit-risk-related contingent features that exist within the individual derivative liabilities identified.

Likewise, under the ASC 815-10-50-4H(c) disclosure requirement, the fair values of the individual derivative liabilities would be aggregated (without consideration of offsetting collateral). Finally, under the ASC 815-10-50-4H(d)–(f) disclosures, an entity would aggregate (1) the collateral already posted as of the reporting date for each of the individual derivative liabilities and (2) the remaining liquidity exposure of each individual derivative liability (if it is assumed that the worst-case credit contingency for each individual derivative liability was triggered as of the reporting date).

Example 23 in ASC 815-10-55-185, which is reproduced below, provides an illustration of liquidity risk disclosures.

ASC 815-10

55-185 This Example illustrates the disclosure of credit-risk-related contingent features in derivative instruments as required by paragraph 815-10-50-4H.

Contingent Features

Certain of the Entity’s derivative instruments contain provisions that require the Entity’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Entity’s debt were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on December 31, 2009, is $XX million for which the Entity has posted collateral of $X million in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on December 31, 2009, the Entity would be required to post an additional $XX million of collateral to its counterparties.

7.5.3.2.1 Multiple Credit-Risk-Related Triggers

Some derivative contracts contain multiple credit-risk-related contingent features. For example, a contract may require an entity to post escalating amounts of collateral with the counterparty as the entity’s credit rating deteriorates along a defined rating spectrum.

On the basis of discussions with the FASB staff, we understand that the disclosure requirements in ASC 815-10-50-4H(d)–(f) are meant to provide financial statement users with information about the entity’s potential liquidity exposure under a “worst-case” credit scenario. The worst-case exposure represents the maximum amount of additional collateral or payment that would be required (beyond what has already been posted) if the credit-risk-related contingent feature providing the greatest liquidity exposure to the entity is triggered at the end of the reporting period, regardless of the likelihood of the feature being triggered.

Note that with respect to the disclosures in ASC 815-10-50-4H(d)–(f), the worst-case credit scenario is based on the population of credit-risk-related contingent features within a contract and would not take into account the contract default or bankruptcy of the entity, which is consistent with item 7 of step 3 in the evaluation of credit-risk-related contingent features in Section 7.5.3.1.1.

The ASC 815-10-50-4H(d)–(f) disclosures represent an aggregation of the liquidity exposures associated with each derivative liability on the basis of the credit-risk-related contingent features specific to each derivative. Likewise, the assessment of the worst-case credit exposure is performed at the individual derivative level as opposed to being based on the single contingency that would have the most significant liquidity impact when applied across an entity’s entire derivative portfolio.

The guidance expressed above applies equally to the ASC 815-10-50-4H(a) and (b) disclosures. In other words, entities should focus their discussion of the “existence and nature of credit-risk-related contingent features” on those features that require the maximum amount of additional collateral or payment (beyond what has already been posted) for each individual derivative liability.

When multiple credit-risk-related contingent features exist within individual derivative contracts, entities are encouraged to consider supplemental disclosure to highlight the potential liquidity exposure associated with each contingency. It is not necessary to ascribe probabilities to the contingencies being triggered nor is it appropriate to exclude contingencies on the basis of a belief that the likelihood of their occurrence is remote.

7.5.3.2.2 Disclosure of Nonderivative Positions

The liquidity disclosures in ASC 815-10-50-4H are only required for derivatives recognized at fair value on the balance sheet. However, an entity is encouraged to disclose how contracts other than derivative instruments affect its potential (or worst-case) liquidity exposure to derivatives (i.e., whether the impact is an increased or decreased liquidity exposure). For example, an entity may hold contracts subject to the NPNS scope exception in ASC 815-10-15-13 or other accrual-based contracts that are governed under the same master netting arrangement as the derivative liability in question. If these contracts are in asset or liability positions as of the end of the reporting period, they could reduce or increase, respectively, the entity’s liquidity exposure, as further illustrated in the examples below. By describing its entire liquidity exposure (including how nonderivative instruments may affect its worst-case liquidity exposure to derivatives), an entity is providing financial statement users with more relevant information.

On the basis of discussions with the FASB staff, we understood that there are two acceptable approaches (discussed below) to developing the ASC 815-10-50-4H(d)–(f) disclosures. An entity should apply its adopted approach consistently to all its master netting arrangements and consider disclosing its approach in the notes to the financial statements.

7.5.3.2.2.1 Approach 1

Under Approach 1, an entity determines the potential collateral requirement on the basis of the fair value (or other measure if explicitly referred to in the derivative contract or master netting arrangement) of the derivative liabilities disclosed under ASC 815-10-50-4H(c),3 offset only by derivative asset positions subject to the same master netting arrangement. While this approach is acceptable, the resulting disclosures often do not accurately reflect an entity’s true liquidity exposure in situations in which negative credit events occur and the master netting arrangement also considers the effect of nonderivative positions in determining the amount of collateral required. Under this approach, an entity would ignore nonderivative positions (e.g., NPNS contracts, receivables, or payables), whether additive or subtractive to potential posting or payment requirements, when developing disclosures about its worst-case liquidity exposure. This approach reflects the narrow scope of ASC 815-10-50-4H (i.e., derivatives only).

To comply with the ASC 815-10-50-4H(d)–(f) disclosures, an entity that follows Approach 1 will most likely need to allocate4 collateral posted under a master netting arrangement to specific derivative liabilities.

7.5.3.2.2.2 Approach 2

Under Approach 2, when a master netting arrangement exists, an entity determines its potential exposure on the basis of the contractual relationship (i.e., all contracts subject to the master netting arrangement) and the specific terms of the credit-risk-related contingent features. Master netting arrangements often govern the collateral posting requirements for a basket of positions between counterparties, typically on the basis of a net exposure calculation. Under this approach, an entity is encouraged to consider the effect of master netting arrangements and the impact of all positions under the arrangements (including derivative assets, NPNS contracts, and other accrual positions) when developing the disclosure of the entity’s worst-case liquidity exposure.

As described in more detail in the last example below, while the FASB staff agrees that the full effects of master netting arrangements should be reflected in the ASC 815-10-50-4H(d)–(f) disclosures, it would not object to a disclosure that (1) considers potential offsets to collateral postings or payment requirements (reductions to liquidity exposure) that are driven by nonderivative asset positions in master netting arrangements but (2) ignores potential increases to an entity’s liquidity exposure (beyond the exposure represented by the derivative liability itself) created by nonderivative liabilities under the same master netting arrangement.

Master netting arrangements could affect the amount of additional collateral5 or payments that are required to be disclosed under ASC 815-10-50-4H(e) and (f) in a variety of ways, including the following:

Master netting arrangements could eliminate additional posting or payment requirements if the portfolio is flat or in an asset position to the reporting entity (in such a scenario, a credit-risk-related contingency, such as a credit downgrade, would not prompt a collateral call by the counterparty because the net relationship is an asset to the reporting entity). For example, consider the following positions comprising a relationship under a master netting arrangement as of the balance sheet date (from the perspective of the reporting entity):

In this case, the entity would not be required to post any additional collateral because it has a net asset position with the counterparty. Therefore, the counterparty would have no right to ask for collateral (even in the event of a credit downgrade).
Master netting arrangements could reduce the amount of collateral that must be posted if the reporting entity has an offsetting net asset position with the counterparty when all positions other than derivative liabilities are taken into account. For example, consider the following positions comprising a relationship under a master netting arrangement as of the balance sheet date (from the perspective of the reporting entity):

In this case, the most the counterparty could request is $75; therefore, this amount serves as a cap for the ASC 815-10-50-4H(d)–(f) disclosures. The additional posting requirement could be less than $75 depending on the specific credit features in the master netting arrangement (the worst-case objective feature could require posting of 50 percent of the relationship value, in which case the disclosed amount under this example would be $37.50).
Master netting arrangements could reduce the amount of collateral that must be posted if the reporting entity has already posted some collateral under the relationship. For example, consider the following positions comprising a relationship under a master netting arrangement as of the balance sheet date (from the perspective of the reporting entity):

In this case, the most the counterparty could request is $75; therefore, this amount serves as a cap for the ASC 815-10-50-4H(d)–(f) disclosure. The $75 would then be reduced by any collateral already posted with the counterparty. Even though the $40 posted in this example is most likely related to both the derivative liabilities and NPNS liabilities, the master netting arrangement limits the amounts of additional collateral that could be required as of the balance sheet date to $35 (i.e., $75 – $40) and, accordingly, this amount reflects the entity’s true liquidity exposure. Therefore, $35 is presumed to be the amount required to be disclosed under ASC 815-10-50-4H(e) and (f) because it represents the worst-case exposure should the credit-risk-related contingent feature be triggered. The amount required to be disclosed under ASC 815-10-50-4H(e) and (f) could be less than $35 depending on the specific credit features in the master netting arrangement (the worst-case objective feature could require the posting of 50 percent of the relationship value, in which case the disclosed amount under this example would be $17.50).
Master netting arrangements could increase the amount of collateral that must be posted if the portfolio as a whole is a larger liability than the sum of the derivative liabilities (e.g., if the portfolio includes NPNS contracts that are out-of-the-money). This potential increase would not be a mandatory part of the disclosure (i.e., the increase is related to nonderivatives, so it is technically outside the scope of ASC 815). However, entities are encouraged to incorporate the effects of master netting arrangements since doing so (1) helps achieve symmetry (master netting arrangements could increase or decrease posting or payment requirements) and (2) more accurately reflects liquidity exposure if negative credit events occur. For example, consider the following positions comprising a relationship under a master netting arrangement as of the balance sheet date (from the perspective of the reporting entity):
In this case, there is a recommended application and an acceptable one:
- Recommended application — Because the reporting entity’s exposure to credit features is based on a basket of liabilities (including some nonderivatives), the disclosure should reflect the true worst-case scenario when the overall relationship governed by the master netting arrangement is taken into account. Accordingly, $120 is presumed to be the amount that must be disclosed under ASC 815-10-50-4H(e) and (f) because it represents the worst-case exposure should the credit-risk-related contingent feature be triggered. The amount required to be disclosed under ASC 815-10-50-4H(e) and (f) could be less than $120 depending on the specific credit features in the master netting arrangement (the worst-case objective feature could require posting of 50 percent of the relationship value, in which case the disclosed amount under this example would be $60).
- Acceptable application — The reporting entity’s exposure to credit-risk-related contingent features is based only on its derivative positions. Accordingly, $70 is presumed to be the amount required to be disclosed under ASC 815-10-50-4H(e) and (f), which could be less than $70 depending on the specific credit features in the master netting arrangement (the worst-case objective feature could require posting of 50 percent of the relationship value, in which case the disclosed amount under this example would be $35).

7.5.4 Balance Sheet Offsetting Disclosures

ASC 815-10

50-7 A reporting entity’s accounting policy to offset or not offset in accordance with paragraph 815-10-45-6 shall be disclosed.

50-7A A reporting entity also shall disclose the information required by paragraphs 210-20-50-1 through 50-6 for all recognized derivative instruments accounted for in accordance with Topic 815, including bifurcated embedded derivatives, which are either:

Offset in accordance with either Section 210-20-45 or Section 815-10-45
Subject to an enforceable master netting arrangement or similar agreement.

50-8 A reporting entity shall disclose the amounts recognized at the end of each reporting period for the right to reclaim cash collateral or the obligation to return cash collateral as follows:

A reporting entity that has made an accounting policy decision to offset fair value amounts shall separately disclose amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral that have been offset against net derivative positions in accordance with paragraph 815-10-45-5.
A reporting entity shall separately disclose amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting arrangements that have not been offset against net derivative instrument positions.
A reporting entity that has made an accounting policy decision to not offset fair value amounts shall separately disclose the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting arrangements.

ASC 210-20

Offsetting of Derivatives, Repurchase Agreements, and Securities Lending Transactions

50-1 The disclosure requirements in paragraphs 210-20-50-2 through 50-5 apply to both of the following:

Subparagraph superseded by Accounting Standards Update No. 2013-01.
Subparagraph superseded by Accounting Standards Update No. 2013-01.
Recognized derivative instruments accounted for in accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements accounted for as collateralized borrowings and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset in accordance with either Section 210-20-45 or Section 815-10-45
Recognized derivative instruments accounted for in accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45.

50-2 An entity shall disclose information to enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on its financial position for recognized assets and liabilities within the scope of the preceding paragraph. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities that are in the scope of the preceding paragraph.

50-3 To meet the objective in the preceding paragraph, an entity shall disclose at the end of the reporting period the following quantitative information separately for assets and liabilities that are within the scope of paragraph 210-20-50-1:

The gross amounts of those recognized assets and those recognized liabilities
The amounts offset in accordance with the guidance in Sections 210-20-45 and 815-10-45 to determine the net amounts presented in the statement of financial position
The net amounts presented in the statement of financial position
The amounts subject to an enforceable master netting arrangement or similar agreement not otherwise included in (b):
1. The amounts related to recognized financial instruments and other derivative instruments that either:
  1. Management makes an accounting policy election not to offset.
  2. Do not meet some or all of the guidance in either Section 210-20-45 or Section 815-10-45.
2. The amounts related to financial collateral (including cash collateral).
The net amount after deducting the amounts in (d) from the amounts in (c).

50-4 The information required by the preceding paragraph shall be presented in a tabular format, separately for assets and liabilities, unless another format is more appropriate. The total amount disclosed in accordance with paragraph 210-20-50-3(d) for an instrument shall not exceed the amount disclosed in accordance with paragraph 210-20-50-3(c) for that instrument.

50-5 An entity shall provide a description of the rights of setoff associated with an entity’s recognized assets and recognized liabilities subject to an enforceable master netting arrangement or similar agreement disclosed in accordance with paragraph 210-20-50-3(d), including the nature of those rights.

50-6 If the information required by paragraphs 210-20-50-1 through 50-5 is disclosed in more than a single note to the financial statements, an entity shall cross-reference between those notes.

Under ASC 815-10-50-7A, if an entity has derivative instruments that are either (1) offset in accordance with ASC 210-20-45 or (2) subject to a master netting arrangement or similar arrangement, it is required to comply with the disclosure requirements of ASC 210-20-50-1 through 50-6 (see above).

In addition, ASC 815-10-50-8 requires an entity to separately disclose the amounts of any receivables and payables related to cash collateral under derivative agreements that have been offset against net derivative positions in accordance with ASC 815-10-45-5. If an entity has made an accounting policy decision to not offset the receivables or payables related to cash collateral under derivative agreements against the net derivative positions, it should disclose the amount of those receivables and payables as well as its accounting policy of not offsetting those amounts.

7.5.5 Credit Derivatives

ASC Master Glossary

Credit Derivative

A derivative instrument that has both of the following characteristics:

One or more of its underlyings are related to any of the following:
1. The credit risk of a specified entity (or a group of entities)
2. An index based on the credit risk of a group of entities.
It exposes the seller to potential loss from credit-risk-related events specified in the contract.

Examples of credit derivatives include, but are not limited to, credit default swaps, credit spread options, and credit index products.

ASC 815-10

50-4J For purposes of the following paragraph, the term seller (sometimes referred to as a writer of the contract) refers to the party that assumes credit risk, which could be either:

A guarantor in a guarantee type contract
Any party that provides the credit protection in an option type contract, a credit default swap, or any other credit derivative contract.

50-4K A seller of credit derivatives shall disclose information about its credit derivatives and hybrid instruments (for example, a credit-linked note) that have embedded credit derivatives to enable users of financial statements to assess their potential effect on its financial position, financial performance, and cash flows. Specifically, for each statement of financial position presented, the seller of a credit derivative shall disclose all of the following information for each credit derivative, or each group of similar credit derivatives, even if the likelihood of the seller’s having to make any payments under the credit derivative is remote:

The nature of the credit derivative, including all of the following:
1. The approximate term of the credit derivative
2. The reason(s) for entering into the credit derivative
3. The events or circumstances that would require the seller to perform under the credit derivative
4. The current status (that is, as of the date of the statement of financial position) of the payment/performance risk of the credit derivative, which could be based on either recently issued external credit ratings or current internal groupings used by the seller to manage its risk
5. If the entity uses internal groupings for purposes of item (a)(4), how those groupings are determined and used for managing risk.
All of the following information about the maximum potential amount of future payments under the credit derivative:
1. The maximum potential amount of future payments (undiscounted) that the seller could be required to make under the credit derivative, which shall not be reduced by the effect of any amounts that may possibly be recovered under recourse or collateralization provisions in the credit derivative (which are addressed in items (c) through (f))
2. The fact that the terms of the credit derivative provide for no limitation to the maximum potential future payments under the contract, if applicable
3. If the seller is unable to develop an estimate of the maximum potential amount of future payments under the credit derivative, the reasons why it cannot estimate the maximum potential amount.
The fair value of the credit derivative as of the date of the statement of financial position
The nature of any recourse provisions that would enable the seller to recover from third parties any of the amounts paid under the credit derivative
The nature of any assets held either as collateral or by third parties that, upon the occurrence of any specified triggering event or condition under the credit derivative, the seller can obtain and liquidate to recover all or a portion of the amounts paid under the credit derivative
If estimable, the approximate extent to which the proceeds from liquidation of assets held either as collateral or by third parties would be expected to cover the maximum potential amount of future payments under the credit derivative. In its estimate of potential recoveries, the seller of credit protection shall consider the effect of any purchased credit protection with identical underlying(s).

However, the disclosures required by this paragraph do not apply to an embedded derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another, as described in paragraph 815-15-15-9.

50-4L One way to present the information required by the preceding paragraph for groups of similar credit derivatives would be first to segregate the disclosures by major types of contracts (for example, single-name credit default swaps, traded indexes, other portfolio products, and swaptions) and then, for each major type, provide additional subgroups for major types of referenced (or underlying) asset classes (for example, corporate debt, sovereign debt, and structured finance). With respect to hybrid instruments that have embedded credit derivatives, the seller of the embedded credit derivative shall disclose the information required by the preceding paragraph for the entire hybrid instrument, not just the embedded credit derivatives.

Additional disclosures for entities that write credit derivatives are applicable under ASC 815-10-50-4J through 50-4L. For information about the disclosure requirements related to fair value measurements, see Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option).

7.5.6 Accounting Policies Regarding Derivatives

An entity’s disclosures related to derivatives (other than derivatives related to hedging activities) should include the following accounting policy decisions, if they are significant:

Whether the entity has offset the derivatives with the fair value amounts recognized for receivables and payables related to those derivatives in accordance with ASC 815-10-45-5.
The cash flow statement classification of derivatives.
The accounting for the premium paid (time value) to acquire an option that is classified as HTM or AFS (see ASC 815-10-50-9).

7.5.7 Additional Required Disclosures

Other disclosures may be required by U.S. GAAP or SEC rules and regulations. For example, ASC 825-10-50-20 and 50-21 require disclosures about the concentrations of credit risk of all financial instruments, including derivative instruments. In addition, SEC registrants should refer to the disclosure requirements in SEC Regulation S-X, Rule 4-08(n). Registrants also must comply with the requirements of SEC Regulation S-K, Item 305, in the MD&A section of certain SEC filings.

7.5.8 Convertible Debt Considerations

ASC 470-20

50-1I An entity shall disclose the following information about derivative transactions entered into in connection with the issuance of convertible debt instruments within the scope of this Subtopic regardless of whether such derivative transactions are accounted for as assets, liabilities, or equity instruments:

The terms of those derivative transactions (including the terms of settlement)
How those derivative transactions relate to the instruments within the scope of this Subtopic
The number of shares underlying the derivative transactions
The reasons for entering into those derivative transactions.

An example of a derivative transaction entered into in connection with the issuance of a convertible debt instrument within the scope of this Subtopic is the purchase of call options that are expected to substantially offset changes in the fair value or the potential dilutive effect of the conversion option. Derivative instruments also are subject to the disclosure guidance in Topic 815.

Additional disclosure requirements are applicable for derivative transactions that are entered into in connection with the issuance of convertible debt. For example, entities may simultaneously issue convertible debt and a capped call that limits the potential dilution that would result if and when the convertible debt instrument is settled in the entity’s stock. In such cases, they should follow the guidance in ASC 470-20-50-1I. For further details on accounting for convertible debt instruments, see Deloitte’s Roadmap Issuer’s Accounting for Debt.

7.5.9 Disclosure Matters Related to Hybrid Financial Instruments

7.5.9.1 Embedded Conversion Option That Is No Longer Bifurcated

ASC 815-15

50-3 An issuer shall disclose both of the following for the period in which an embedded conversion option previously accounted for as a derivative instrument under this Subtopic no longer meets the separation criteria under this Subtopic:

A description of the principal changes causing the embedded conversion option to no longer require bifurcation under this Subtopic
The amount of the liability for the conversion option reclassified to stockholders’ equity.

ASC 815-40

50-3 Contracts within the scope of this Subtopic may be required to be reclassified into (or out of) equity during the life of the instrument (in whole or in part) pursuant to the provisions of paragraphs 815-40-35-8 through 35-13. An issuer shall disclose contract reclassifications (including partial reclassifications), the reason for the reclassification, and the effect on the issuer’s financial statements.

If a previously bifurcated embedded conversion option in a hybrid instrument ceases to meet the ASC 815-15 bifurcation criteria, the entity should provide the disclosures required by ASC 815-15-50-3 and ASC 815-40-50-3, as noted above. For further details on the circumstances that could cause a hybrid instrument to no longer meet the bifurcation criteria, see Section 6.4 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity.

7.5.9.2 Inability to Reliably Identify and Measure Embedded Derivative Hybrid Financial Instruments

As indicated in ASC 815-30-35-2, in the unusual situation in which an entity cannot reliably identify and measure an embedded feature that is required to be separated as a derivative, the entity must record the entire hybrid instrument at fair value and recognize changes in fair value through earnings. In practice, this provision is rarely applied. Note that under no circumstance can such an instrument be designated as a hedging instrument under ASC 815-20.

ASC 815-15

45-1 In each statement of financial position presented, an entity shall report hybrid financial instruments measured at fair value under the election and under the practicability exception in paragraph 815-15-30-1 in a manner that separates those reported fair values from the carrying amounts of assets and liabilities subsequently measured using another measurement attribute on the face of the statement of financial position. To accomplish that separate reporting, an entity may do either of the following:

Display separate line items for the fair value and non-fair-value carrying amounts
Present the aggregate of the fair value and non-fair-value amounts and parenthetically disclose the amount of fair value included in the aggregate amount.

As noted above, under ASC 815-15-45-1, if an entity accounts for a hybrid financial instrument at fair value because it cannot reliably identify and measure an embedded derivative, it must report the related fair value amounts separately on the face of the balance sheet under ASC 815-15-45-1.

ASC 815-15

50-1 For those hybrid financial instruments measured at fair value under the election and under the practicability exception in paragraph 815-15-30-1, an entity shall also disclose the information specified in paragraphs 825-10-50-28 through 50-32.

50-2 An entity shall provide information that will allow users to understand the effect of changes in the fair value of hybrid financial instruments measured at fair value under the election and under the practicability exception in paragraph 815-15-30-1 on earnings (or other performance indicators for entities that do not report earnings).

If an entity accounts for a hybrid financial instrument at fair value because it cannot reliably identify and measure an embedded derivative, it must also provide the required disclosures for financial liabilities for which the fair value option in ASC 825-10 has been elected. For further detail on such disclosures, see Section 14.4.11 of Deloitte’s Roadmap Issuer’s Accounting for Debt.

Footnotes

For example, some contracts give entities the ability to seek “performance assurance” in an amount determined in a commercially reasonable manner if and when the counterparty experiences a change in condition (financial or otherwise) that can be reasonably expected to impair the counterparty’s ability to fulfill its obligations. These clauses do not cite specific trigger events (e.g., downgrade events) and do not prescribe specific dollar amounts or percentages of contract value that must be posted as performance assurance.

This guidance addresses disclosure requirements under ASC 815. If there is substantial doubt about an entity’s ability to continue as a going concern, the entity would most likely be required to provide additional disclosures, including disclosures that indicate the consequences of bankruptcy or liquidation. Going-concern considerations are beyond the scope of this guidance.

ASC 815-10-50-4H(c) requires entities to disclose the “aggregate fair value amounts of derivative instruments . . . that contain credit-risk-related contingent features that are in a net liability position at the end of the reporting period.”

When determining amounts already posted, an entity may need to allocate posted collateral among derivative and nonderivative positions (e.g., if collateral is posted for a net relationship liability under a master netting arrangement and the relationship consists of derivatives and nonderivatives). Allocation approaches should be reasonable and consistently applied. For guidance on allocation methods under ASC 815-10-45-1 through 45-7 and ASC 210-20-45-1 through 45-5, see Section 7.2.1.1.5).

For simplicity, it is assumed in the examples below that collateral requirements are calculated by reference to the GAAP fair value of the contract (or the portfolio when master netting arrangements are considered) as of the balance sheet date. If contracts (or master netting arrangements) require posting of collateral on a different basis, an entity should use the basis prescribed in the contract to develop the disclosures under ASC 815-10-50-4H(d)–(f). It is also assumed in the examples that the most a counterparty can request is 100 percent collateralization.