6.6 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. For the
remainder of the discussion about disclosures, all references to qualifying hedging
instruments include both derivatives and nonderivative instruments that are
designated in qualifying hedging relationships. Since this Roadmap focuses on hedge
accounting, it does not discuss the disclosure requirements in ASC 815-10-50-4J
through 50-4L for entities that write credit derivatives. 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).
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.
6.6.1 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:
-
An entity’s financial position
-
An entity’s financial performance
-
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:
-
Derivative instruments (and nonderivative instruments) designated as hedging instruments, distinguished between each of the following:
-
Derivative instruments (and nonderivative instruments) designated as fair value hedging instruments
-
Derivative instruments designated as cash flow hedging instruments
-
Derivative instruments (and nonderivative instruments) designated as hedging instruments for hedges of the foreign currency exposure of a net investment in a foreign operation.
-
-
Derivative instruments used as economic hedges and for other purposes related to the entity’s risk exposures.
-
-
Derivative instruments used for other purposes.
50-3 If the simplified hedge
accounting approach (see paragraphs 815-20-25-133
through 25-138) is applied in accounting for a
qualifying receive-variable, pay-fixed interest rate
swap, the settlement value of that swap may be used in
place of fair value when disclosing the information
required by this Section or in providing other fair
value disclosures, such as those required under Topic
820 on fair value. For the purposes of complying with
these disclosure requirements, amounts disclosed at
settlement value will be subject to all of the same
disclosure requirements as amounts disclosed at fair
value. Any amounts disclosed at settlement value shall
be clearly stated as such and disclosed separately from
amounts disclosed at fair value.
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 or nonderivative hedging instruments should disclose
information to enable financial statement users to understand how and why it
uses derivatives (including those nonderivative instruments designated as
hedging instruments) in the context of its operations.
ASC 815-10-50-1 requires disclosures about the following:
-
How and why an entity uses derivative instruments (or . . . nonderivative [hedging] instruments)
-
How derivative instruments (or . . . nonderivative [hedging] instruments) and related hedged items are accounted for under Topic 815
-
How derivative instruments (or . . . nonderivative [hedging] instruments) and related hedged items affect all of the following:
-
An entity’s financial position [i.e., balance sheet]
-
An entity’s financial performance [i.e., comprehensive income statements]
-
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 or
nonderivative hedging instruments. 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.”
As part of the disclosure about instruments used for risk management purposes,
ASC 815-10-50-5 requires an entity to present a separate discussion about its
objectives and strategies for using qualifying hedging instruments “in the
context of [its] overall risk exposures relating to all of the following:
-
Interest rate risk
-
Foreign exchange risk
-
Commodity price risk
-
Credit risk
-
Equity price risk.”
ASC 815-10-50-5A encourages but does not require entities to disclose “similar
information . . . about other financial instruments or nonfinancial assets and
liabilities to which the [hedging] instruments are related by activity.”
ASC 815-10-50-2 notes that the disclosures required by ASC 815-10-50-1A(a)–(c)
(i.e., related to the entity’s objectives for holding derivatives and strategies
for achieving those objectives) should be provided separately on the basis of
the entity’s purpose for holding the derivatives, broken down as follows:
-
Derivative instruments (and nonderivative [hedging] instruments . . . ) used for risk management purposes, distinguished between each of the following:
-
[Qualifying] hedging instruments, distinguished between each of the following:
-
[Those] designated as fair value hedging instruments
-
[Those] designated as cash flow hedging instruments
-
[Those] designated as [hedges] of a net investment in a foreign operation.
-
-
Derivative instruments used as economic hedges and for other purposes related to the entity’s risk exposures.
-
-
Derivative instruments used for other purposes.
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.
As indicated in ASC 815-10-50-3, if an entity is applying the simplified hedge
accounting approach (see Sections 2.5.2.2.5 and 4.2.1.1.5), the swap’s settlement value may be
used in place of its fair value for any required disclosures of fair value.
Example 20 in ASC 815-10-55-181, which is reproduced below, provides an
illustration of these disclosures as well as the fair value hedge basis
adjustment disclosures discussed in Section 6.6.2.1.3.
ASC 815-10
55-181 This Example
illustrates the disclosure of objectives and strategies
for using derivative instruments by underlying risk,
including volume of activity (see paragraph
815-10-50-1A(d)). It also illustrates the fair value
hedge basis adjustment disclosures in paragraphs
815-10-50-4EE through 50-4EEE.
The Entity is exposed to certain
risks relating to its ongoing business operations. The
primary risks managed by using derivative instruments
are commodity price risk and interest rate risk. Forward
contracts on various commodities are entered into to
manage the price risk associated with forecasted
purchases of materials used in the Entity’s
manufacturing process. Interest rate swaps are entered
into to manage interest rate risk associated with
fixed-rate loans issued by the Entity’s financing
subsidiary.
FASB ASC 815-10 requires that an
entity recognize all derivative instruments as either
assets or liabilities at fair value in the statement of
financial position. In accordance with that Subtopic,
the Entity designates commodity forward contracts as
cash flow hedges of forecasted purchases of commodities
and interest rate swaps as fair value hedges of
fixed-rate receivables.
Cash Flow Hedges
For derivative instruments that are
designated and qualify as a cash flow hedge, the gain or
loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified
into earnings in the same period or periods during which
the hedged transaction affects earnings and is presented
in the same income statement line item as the earnings
effect of the hedged item. Gains and losses on the
derivative instrument representing hedge components
excluded from the assessment of effectiveness are
recognized currently in earnings and are presented in
the same line of the income statement expected for the
hedged item.
As of December 31, 20X2, the Entity
had the following outstanding commodity forward
contracts that were entered into to hedge forecasted
purchases:
Fair Value Hedges
For derivative instruments that are
designated and qualify as a fair value hedge, the gain
or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable
to the hedged risk are recognized in current earnings.
The Entity includes the gain or loss on the hedged items
(that is, fixed-rate receivables) in the same line item
— interest income — as the offsetting loss or gain on
the related interest rate swaps.
As of December 31, 20X2, and 20X1,
the following amounts were recorded on the balance sheet
related to cumulative basis adjustments for fair value
hedges.
As of December 31, 20X2, and 20X1,
the total notional amount of the Entity’s
pay-fixed/receive-variable interest rate swaps was $79
and $82, respectively.
Pending Content (Transition Guidance: ASC
815-20-65-6)
55-181 [See Section 9.7.]
6.6.2 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:
-
The statement of financial performance
-
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 disclosure
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.
For quantitative disclosures about hedging instruments related to the balance
sheet, only instruments that are in qualifying hedging relationships on the
balance sheet date should be included as hedging instruments. For quantitative
disclosures about hedging instruments related to the statements of financial
performance, gains and losses that were recognized while the hedging instrument
was in a qualifying hedging relationship should be included in qualifying
hedging activities, even if those hedging relationships are no longer in place
on the balance sheet date. Bifurcated embedded derivatives should be included in
disclosures about derivative instruments.
Example 6-3
Hedging Instrument Only in Hedging Relationship for
Portion of Period
At the beginning of a reporting period, Mercury
Provisions issues variable-rate debt and
contemporaneously enters into a pay-fixed,
receive-variable interest rate swap to hedge the cash
flow exposure created by the debt’s variable interest
payments. Mercury designates the swap as a cash flow
hedge at inception, and the swap meets all the criteria
for hedge accounting. Later, during the same reporting
period, Mercury decides to dedesignate the swap, thereby
discontinuing the cash flow hedge. Before dedesignation,
the swap’s fair value increased by $50, all of which was
recorded in OCI. After dedesignation, during the
remainder of the reporting period, the swap’s fair value
increased by another $40 and Mercury recognized
unrealized gains of $40 directly in earnings.
Because the interest rate swap was designated as the
hedging instrument in a cash flow hedge for the first
portion of the reporting period, the $50 unrealized gain
recorded in OCI must be disclosed in Mercury’s tabular
disclosures separately and apart from the $40 unrealized
gain on the swap that was recognized after dedesignation
of the cash flow hedge (i.e., when the interest rate
swap was no longer designated as a hedging instrument).
The $90 fair value of the derivative at the end of the
reporting period should be attributed to a nonhedging
derivative in the balance sheet disclosures because the
hedging relationship is no longer active as of the
reporting date.
Note that when a formerly designated hedge results in
reclassification of AOCI into earnings in future periods
(periods in which the hedge is not designated), an
entity should include the amounts reclassified out of
AOCI in its tabular disclosures of the gains/losses on
the hedging derivative.
6.6.2.1 Quantitative Disclosures Related to the Balance Sheet
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 . . . .
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:
-
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)
-
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.
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(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 (see Section 6.6.2.1.1).
-
Payables and receivables related to cash collateral associated with derivatives should “not be added to or netted against the fair value amounts” (see Section 6.6.2.1.2).
-
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:
. . .
6.6.2.1.1 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 6-4
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:
6.6.2.1.2 Receivables or Payables Related to Cash Collateral From Derivatives
As discussed in Section 6.2.1.1.3, 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.
6.6.2.1.3 Basis Adjustments for Hedged Items in Fair Value Hedges
ASC 815-10
50-4EE An entity shall
disclose in tabular format the following for items
designated and qualifying as hedged items in fair
value hedges:
-
The carrying amount of hedged assets and liabilities recognized in the statement of financial position. For an available-for-sale debt security, the amount disclosed is the amortized cost basis.
-
The cumulative amount of fair value hedging adjustments to hedged assets and liabilities included in the carrying amount of the hedged assets and liabilities recognized in the statement of financial position.
-
The line item in the statement of financial position that includes the hedged assets and liabilities.
-
The cumulative amount of fair value hedging adjustments remaining for any hedged assets and liabilities for which hedge accounting has been discontinued.
The disclosures required by (b) and (d) shall
exclude cumulative basis adjustments related to
foreign exchange risk.
50-4EEE
For each line item disclosed in accordance with
paragraph 815-10-50-4EE(c) that includes hedging
relationships designated under the last-of-layer
method in accordance with paragraph 815-20-25-12A,
the following information shall be disclosed
separately:
-
The amortized cost basis of the closed portfolio(s) of prepayable financial assets or the beneficial interest(s)
-
The amount that represents the hedged item(s) (that is, the designated last of layer)
-
The basis adjustment associated with the hedged item(s) (that is, the designated last of layer).
Example 20 (see paragraph 815-10-55-181)
illustrates these disclosures.
Pending Content (Transition Guidance: ASC
815-20-65-6)
50-4EEE [See Section 9.7.]
50-5B For
hedging relationships designated under the
last-of-layer method, an entity may need to
allocate the outstanding basis adjustment to meet
the objectives of disclosure requirements in other
Topics. For purposes of those disclosure
requirements, the entity may allocate the basis
adjustment on an individual asset basis or on a
portfolio basis using a systematic and rational
method.
Pending Content (Transition Guidance: ASC
815-20-65-6)
50-5B [See Section 9.7.]
ASC 815 also requires additional disclosures related to fair value
hedging relationships. For example, under ASC 815-10-50-4EE, an entity
must present a separate tabular disclosure to inform financial statement
users about the following:
- For assets and liabilities that are currently the hedged item in
qualifying hedging relationships as of the balance sheet date:
-
The carrying amount.
-
The cumulative amount of basis adjustments.
-
The locations (i.e., line items) of such amounts on the balance sheet.
-
- The cumulative amount of remaining basis adjustments on assets and liabilities that were previously in fair value hedging relationships.
After the issuance of ASU 2017-12, the FASB staff clarified in a public
Board meeting that the purpose of the fair value hedge basis adjustment
disclosures is to provide financial statement users with the information
they need to evaluate the amount, timing, and uncertainty of future cash
flows associated with hedged assets or liabilities. Specifically, the
disclosures required by the ASU were designed to provide financial
statement users with additional information about fair value basis
adjustments that will not affect future cash flows; therefore, basis
adjustments that will affect future cash flows, such as foreign
exchange risk basis adjustments, are excluded from these requirements.
Thus, the ASU’s disclosure requirements would not apply to a fair value
hedging relationship in which the sole hedged risk is the changes in
fair value that are attributable to changes in a specified foreign
currency exchange rate. In addition, the FASB staff indicated that for a
hedged AFS debt security, the carrying amount that an entity should
disclose should be its amortized cost basis and not its fair value. The
Board agreed with both of these clarifications.
ASC 815-10-50-4EEE requires entities to provide additional disclosures
about the basis adjustments related to last-of-layer hedging
relationships (see Section
3.2.1.4). The following information must be disclosed separately:
-
The amortized cost basis of the hedged item (portfolio of assets or beneficial interest).
-
The designated last of layer.
-
The basis adjustment related to the hedged item.
ASC 815-10-50-5B notes that for such disclosures, an entity should use a
systematic and rational method to allocate the portfolio-level basis
adjustment arising from the last-of-layer hedging relationship to the
individual items within that portfolio. Any method selected should be
documented and consistently applied.
Example 20 in ASC 815-10-50-181 includes an illustration of these
disclosures (see Section
6.6.1).
Changing Lanes
In March 2022, the FASB issued ASU
2022-01, which clarifies the guidance in ASC
815 on fair value hedge accounting of interest rate risk for
portfolios of financial assets. ASU 2022-01 renames the
“last-of-layer” method the “portfolio layer” method and
addresses feedback from stakeholders regarding its application.
It also amends some of the presentation and disclosure
requirements related to portfolio layer method basis
adjustments. In addition, in the event a breach has occurred,
the ASU requires the portion of the basis adjustment related to
the breached portion of the portfolio to be reclassified into
interest income. See Chapter 9 for a more
thorough discussion of ASU 2022-01.
6.6.2.1.4 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 6.2.2). 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.
6.6.2.1.5 Derivatives With a Proportion Designated in a Qualifying Hedging Relationship
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.”
Example 6-5
Proportion
of a Derivative in a Qualifying Hedge — Balance
Sheet Line Item for Tabular Disclosure
Reprise uses aluminum in its
day-to-day operations. It has forecasted a
purchase of two tons of aluminum on April 30,
20X8. On January 1, 20X7, Reprise enters into a
derivative contract and designates 60 percent of
that contract as a hedge of the variability in
future cash flows attributable to changes in the
forecasted purchase price of aluminum. The
contract has a fair value of $0 at inception.
As of December 31, 20X7, the
fair value of the entire derivative contract has
increased by $100. As long as the hedging
relationship is still deemed highly effective, the
60 percent of the gain ($60) that is attributable
to the hedging portion of the derivative is
recorded in OCI. Reprise records the remaining 40
percent of the gain ($40) that is attributable to
the proportion of the derivative that is
not a designated and qualifying hedging
instrument directly in earnings.
As of April 1, 20X8, the fair
value of the entire derivative contract has
increased by another $60. As long as the hedging
relationship is still deemed highly effective, the
60 percent of the gain ($36) that is attributable
to the hedging portion of the derivative is
recorded in OCI because the forecasted transaction
has not yet affected earnings. Reprise records the
remaining 40 percent of the gain ($24) that is
attributable to the proportion of the derivative
that is not a designated and qualifying
hedging instrument directly in earnings.
On April 30, 20X8, Reprise
purchases two tons of aluminum, and on May 4,
20X8, it sells its aluminum-based products to
consumers. Upon the sale of the aluminum-based
products, in accordance with ASC 815-30-35-38,
Reprise reclassifies the amounts recorded in AOCI
into earnings and presents them in the same income
statement line item as the earnings effect of the
hedged item (aluminum), or cost of sales in this
example. Cost of sales, as reported on the face of
the statement of financial performance, is $500
for the year ended December 31, 20X8.
Below is an example of a tabular
disclosure that Reprise could provide to reflect
amounts related to this derivative in accordance
with ASC 815-10-50-40A(a). See Example
6-6 for an illustration of the tabular
disclosure that Reprise could provide to reflect
amounts related to this derivative in the
statement of financial performance.
6.6.2.2 Quantitative Disclosures Related to Statements of Financial Performance
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: . . .
b. 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).
c. 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.
50-4C For qualifying fair
value and cash flow hedges, the gains and losses
disclosed pursuant to paragraph 815-10-50-4A(b)
shall be presented separately for all of the
following by type of contract (as discussed in
paragraph 815-10-50-4D) and by income and expense
line item (if applicable):
a. Derivative instruments (and nonderivative
instruments) designated and qualifying as hedging
instruments in fair value hedges and related
hedged items designated and qualifying in fair
value hedges.
b. The gains and losses on derivative
instruments designated and qualifying in cash flow
hedges included in the assessment of effectiveness
that were recognized in other comprehensive income
during the current period.
bb. Amounts excluded from the assessment of
effectiveness that were recognized in other
comprehensive income during the period for which
an amortization approach is applied in accordance
with paragraph 815-20-25-83A.
c. The gains and losses on derivative
instruments designated and qualifying in cash flow
hedges that are included in the assessment of
effectiveness and recorded in accumulated other
comprehensive income during the term of the
hedging relationship and reclassified into
earnings during the current period.
d. The portion of gains and losses on
derivative instruments designated and qualifying
in fair value and cash flow hedges representing
the amount, if any, excluded from the assessment
of hedge effectiveness that is recognized in
earnings. When disclosing this amount, an entity
shall disclose separately amounts that are
recognized in earnings through an amortization
approach in accordance with paragraph
815-20-25-83A and amounts recognized through
changes in fair value in earnings in accordance
with paragraph 815-20-25-83B.
1. Subparagraph
superseded by Accounting Standards Update No.
2017-12.
2. Subparagraph
superseded by Accounting Standards Update No.
2017-12.
e. Subparagraph superseded by Accounting
Standards Update No. 2017-12.
f. The gains and losses reclassified into
earnings as a result of the discontinuance of cash
flow hedges because it is probable that the
original forecasted transactions will not occur by
the end of the originally specified time period or
within the additional period of time discussed in
paragraphs 815-30-40-4 through 40-5.
g. The amount of net gain or loss recognized
in earnings when a hedged firm commitment no
longer qualifies as a fair value hedge.
50-4CC An entity shall
present separately by type of contract (as discussed
in paragraph 815-10-50-4D) the gains and losses
disclosed in accordance with paragraph
815-10-50-4A(b) for derivative instruments not
designated or qualifying as hedging instruments
under Topic 815 (see paragraph 815-10-50-4F).
50-4CCC For qualifying net
investment hedges, an entity shall present the gains
and losses disclosed in accordance with paragraph
815-10-50-4A(b) separately for all of the following
by type of contract (as discussed in paragraph
815-10-50-4D):
-
The gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges that were recognized in the cumulative translation adjustment section of other comprehensive income during the current period
-
The gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges recorded in the cumulative translation adjustment section of accumulated other comprehensive income during the term of the hedging relationship and reclassified into earnings during the current period
-
The portion of gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges representing the amount, if any, excluded from the assessment of hedge effectiveness.
50-4D Disclosures pursuant
to paragraphs 815-10-50-4C through 50-4CCC shall
both:
- Be presented separately by type of contract,
for example:
-
Interest rate contracts
-
Foreign exchange contracts
-
Equity contracts
-
Commodity contracts
-
Credit contracts
-
Other contracts.
-
- Identify the line item(s) in the statement of financial performance in which the gains and losses for these categories 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) are included.
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(b) requires an entity to provide a tabular disclosure of the
locations and amounts of gains and losses on qualifying hedging instruments
and related hedged items in the statement of financial performance,
including those amounts that are recognized in OCI in the current period.
ASC 815-10-50-40A(c) requires those gains and losses to be further
disaggregated into amounts resulting from qualifying fair value hedging
relationships and amounts resulting from cash flow hedging
relationships.
ASC 815-10-50-4C breaks down the disclosure requirements into further detail.
It requires entities to separately disclose the following amounts in the
footnotes and to show how each amount affected the related income and
expense line item in the statement of operations:
-
Gains and losses on qualifying hedging instruments and related hedged items designated in fair value hedging relationships.
-
Gains and losses recognized in OCI for qualifying hedging instruments designated in cash flow hedging relationships.
-
Amounts recognized in OCI related to excluded components if the entity elected to amortize the initial value into earnings.
-
Amounts reclassified out of AOCI if the forecasted transactions in a cash flow hedging relationship affected earnings.
-
Amounts recognized in earnings related to excluded components broken down between:
-
Amounts recognized in earnings under an amortization approach.
- Amounts recognized in earnings under the change in fair value approach.
-
-
Amounts that were reclassified out of AOCI because it was probable that the forecasted transaction would not occur by the end of the originally specified time period or within the allowable additional time period.
-
Gains and losses that were recognized when a hedged firm commitment no longer qualified as a fair value hedge.
ASC 815-10-50-4CC requires entities to separately disclose gains and losses
on derivatives that were not designated in qualifying hedging
relationships.
In addition, ASC 815-10-50-4CCC requires entities to disclose the impact of
qualifying net investment hedging relationships on the statements of
financial performance. Entities must provide the following information
related to net investment hedges:
-
Gains and losses recognized in CTA.
-
Gains and losses reclassified out of CTA and into earnings.
-
Gains and losses related to excluded components.
According to ASC 815-10-50-4D, all of the disclosures required by ASC
815-10-50-4C through 50-4CCC must “be presented separately by type of
contract, for example:
-
Interest rate contracts
-
Foreign exchange contracts
-
Equity contracts
-
Commodity contracts
-
Credit contracts
-
Other contracts.”
Entities should also identify the appropriate line item in the statements of
financial performance for each of the above amounts.
ASC 815-10-55-182 provides an illustrative example of the tabular disclosures
required by ASC 815-10-50-4A. The portion of the example related to the
statements of financial performance (those required by ASC 815-10-50-4A(b)
and (c)) 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: . . .
6.6.2.2.1 Derivatives With a Proportion Designated in a Qualifying Hedging Relationship
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.”
Example 6-6
Proportion of Derivative in Qualifying Hedge —
Statements of Financial Performance Tabular
Disclosures
Reprise uses aluminum in its day-to-day
operations. It has forecasted a purchase of two
tons of aluminum on April 30, 20X8. On January 1,
20X7, Reprise enters into a derivative contract
and designates 60 percent of that contract as a
hedge of the variability in future cash flows
attributable to changes in the forecasted purchase
price of aluminum. The contract has a fair value
of $0 at inception.
As of December 31, 20X7, the
fair value of the entire derivative contract has
increased by $100. As long as the hedging
relationship is still deemed highly effective, the
60 percent of the gain ($60) that is attributable
to the hedging portion of the derivative is
recorded in OCI. Reprise records the remaining 40
percent of the gain ($40) that is attributable to
the proportion of the derivative that is
not a designated and qualifying hedging
instrument directly in earnings.
As of April 1, 20X8, the fair
value of the entire derivative contract has
increased by another $60. As long as the hedging
relationship is still deemed highly effective, the
60 percent of the gain ($36) that is attributable
to the hedging portion of the derivative is
recorded in OCI because the forecasted transaction
has not yet affected earnings. Reprise records the
remaining 40 percent of the gain ($24) that is
attributable to the proportion of the derivative
that is not a designated and qualifying
hedging instrument directly in earnings.
On April 30, 20X8, Reprise purchases two tons of
aluminum, and on May 4, 20X8, it sells its
aluminum-based products to consumers. Upon the
sale of the aluminum-based products, in accordance
with ASC 815-30-35-38, Reprise will reclassify the
amounts recorded in AOCI into earnings and present
such amounts in the same income statement line
item as the earnings effect of the hedged item
(aluminum), or cost of sales in this example. Cost
of sales, as reported on the face of the statement
of financial performance, is $500 for the year
ended December 31, 20X8.
Below is an example of tabular
disclosures that Reprise could provide to reflect
the effect of hedge accounting on the statements
of financial performance in accordance with ASC
815-10-50-40A(b) and (c). See Example 6-5 for an
illustration of the tabular disclosure that
Reprise could provide to reflect amounts related
to this derivative in the balance sheet.
6.6.2.2.2 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:
-
Fixed income/interest rates
-
Foreign exchange
-
Equity
-
Commodity
-
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:
-
Fixed income/interest rates
-
Foreign exchange
-
Equity
-
Commodity
-
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.
6.6.2.2.3 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, not-for-profit entities 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 a not-for-profit entity (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.
6.6.3 Liquidity Risk Disclosures
6.6.3.1 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.
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. Example
23 (see paragraph 815-10-55-185) illustrates a
credit-risk-related contingent feature
disclosure.
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 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.”
6.6.3.1.1 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).
6.6.3.1.1.1 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
(see Section 6.6.2.1).
6.6.3.1.1.2 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 (see
Section 6.6.3.1.1.4 for further discussion
of LCs). 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 normal purchases and normal sales 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 6.2.1). 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 6-7
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).
6.6.3.1.1.3 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 ratio or quick ratio) or financial leverage ratios (e.g., debt ratio or debt-to-equity ratio) 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 following
examples 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.
|
6.6.3.1.1.4 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
specified events (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.
6.6.3.1.2 Liquidity Risk Disclosure Requirements
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.
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. Example 23 (see paragraph
815-10-55-185) illustrates a credit-risk-related
contingent feature disclosure.
Once the population of derivative liabilities
subject to the liquidity risk disclosures required in ASC
815-10-50-4H is identified (see Section
6.6.3.1.1), 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.
6.6.3.1.2.1 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 6.6.3.1.1.
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.
6.6.3.1.2.2 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 normal purchases and normal sales 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 indicated 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.
6.6.3.1.2.2.1 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., normal purchases and
normal sales 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.
6.6.3.1.2.2.2 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, normal purchases and normal sales
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 normal purchases and normal sales liabilities, the master netting arrangement limits the amounts of additional collateral that could be required as of the balance sheet date to $35 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 normal purchases and normal sales 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):
-
Recommended application — In this case, the reporting entity’s exposure to credit features is based on a basket of liabilities (including some nonderivatives); therefore, 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).
-
6.6.4 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.
Pending Content (Transition Guidance: ASC
105-10-65-7)
50-8C See paragraph 230-10-50-9 for
disclosure requirements related to where cash
flows associated with derivative instruments and
their related gains and losses are presented in
the statement of cash flows.
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):
-
The amounts related to recognized financial instruments and other derivative instruments that either:
- Management makes an accounting policy election not to offset.
- Do not meet some or all of the guidance in either Section 210-20-45 or Section 815-10-45.
-
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 (see Section 6.2.1) 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.
6.6.5 Accounting Policies Regarding Derivatives and Hedging Activities
An entity’s disclosures 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 (see Section 6.2.1.1.3).
-
Whether the entity elects to record changes in the excluded components’ fair value (see Section 2.5.2.1.2.1) currently in earnings (see ASC 815-10-50-4EEEE).
-
Whether the entity has allocated significant portfolio-level credit adjustments to individual hedging instruments when performing hedge effectiveness assessments and what allocation method was used (see Section 2.5.2.1.2.6.3).
-
The income statement classification of amounts that are reclassified out of AOCI when it becomes probable that a forecasted transaction will not occur within two months of the timeframe originally designated (see Section 4.1.5.2).
-
The income statement classification of excluded components of derivatives in qualifying net investment hedging relationships.
-
The income statement classification of economic hedging activities.
-
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).
6.6.6 SEC Registrants
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.
Footnotes
1
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.
2
This guidance addresses
disclosure requirements under ASC 815. If there is
substantial doubt about an entity’s ability to
continue as a going concern, it 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.
3
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.”
4
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
6.2.1.1.5).
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.