Accounting for Derivative Instruments and Hedging Activities
Topic ASC 815 (previously FAS 161) was issued by the Financial Accounting Standards Board (FASB) and has been effective since November 2008.
Topic 815 requires that an entity recognize derivative instruments, including certain derivative instruments enbedded in other contracts, as assets or liabilities in the statement of financial position and measure them at fair value. The ability to apply hedge accounting is optional. If a derivative qualifies as a hedge, the gains or losses from the derivative will match or offset the gains or losses from the value of the underlying transaction. To qualify for hedge accounting, Topic 815 provides rules and procedures for hedge effectiveness testing. If the derivative is ineffective, it is marked-to-market (MTM) in the companies' earnings.
Topic 815 requires enhanced disclosures about an entity's derivative and hedging activities, thereby improving the transparency of financial reporting. Specifically:
- How and why an entity uses derivative instruments.
- How derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations.
- How derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows.
We hope that this information will assist you, but it should not be used or relied upon as a substitute for your own independent research. For a more comprehensive view of the standards/requirements, please visit the respective issuer's website.