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Chapter 2 — Hedge Accounting Requirements

2.5 Hedge Effectiveness

2.5 Hedge Effectiveness

ASC 815-20
25-75 To qualify for hedge accounting, the hedging relationship, both at inception of the hedge and on an ongoing basis, shall be expected to be highly effective in achieving either of the following:
  1. Offsetting changes in fair value attributable to the hedged risk during the period that the hedge is designated (if a fair value hedge)
  2. Offsetting cash flows attributable to the hedged risk during the term of the hedge (if a cash flow hedge), except as indicated in paragraph 815-20-25-50.

Footnotes

8
See Section 2.6.1 for a discussion of the required timing of the initial hedge effectiveness assessment.
9
As discussed in Sections 2.6.2 and 2.6.3, private companies that are not financial institutions or not-for-profit entities (other than those that have issued, or are a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter [OTC] market) do not have to prepare this documentation until their next set of financial statements (including interim financial statements, if applicable) is available to be issued.
10
The slope of the regression should be negative in the comparison of the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item that are attributable to the hedged risk. This is because the purpose of a hedge is for the effects of the derivative to offset the hedged risk. However, in some cases, the slope should be positive (within the same 0.8 to 1.25 parameters). For example, if an entity is using the hypothetical-derivative method to assess effectiveness, the purpose of the regression is to compare changes in the fair value of the actual derivative to the changes in the fair value of a hypothetical derivative that would have been a “perfect” hedging derivative.
11
Entities using foreign currency forwards or cross currency interest rate swaps to hedge foreign currency exposures have experienced recent challenges as a result of changes in foreign currency exchange rates, requiring some entities to make unfavorable final settlement payments. In these situations, entities are more frequently considering blend and extend strategies to avoid the unfavorable outlay of cash at final settlement.
12
Paragraph 68(e) of FASB Statement 133 is codified in ASC 815-20-25-104(g).