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Hedges: Fair Value vs Cash Flow Explained

This document discusses hedge accounting and derivatives. It outlines how to account for changes in fair value of derivatives and hedged items depending on whether they are designated as a cash flow hedge, fair value hedge, or have no hedging designation. It provides mnemonics to remember the accounting treatment and examples of common derivatives like interest rate swaps, forward contracts, and foreign currency forwards.

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ralphalonzo
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635 views1 page

Hedges: Fair Value vs Cash Flow Explained

This document discusses hedge accounting and derivatives. It outlines how to account for changes in fair value of derivatives and hedged items depending on whether they are designated as a cash flow hedge, fair value hedge, or have no hedging designation. It provides mnemonics to remember the accounting treatment and examples of common derivatives like interest rate swaps, forward contracts, and foreign currency forwards.

Uploaded by

ralphalonzo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
  • Derivatives and Hedge Accounting

Derivatives AND HEDGE ACCOUNTING

Measurement: Fair value

Situations:

Cash flow hedge Fair value hedge No hedging designation

FV of derivative OCI (effective portion) P/L P/L


P/L (ineffective portion)

FV of hedged item Not adjusted to fair value Adjusted to fair value

Terms used Unrealized gain/loss Realized gain/loss


This is like a speculation.
Mnemonics N not adjusted to FV F receive fixed
O OCI R realized
V receive variable A adjusted to FV
U unrealized P P/L

Examples of derivatives

1. Interest rate swap


a. Receive variable, pay fixed interest rate swap (cash flow hedge)
b. Receive fixed, pay variable interest rate swap (fair value hedge)
2. Forward contract
3. Futures contract
4. Option
5. Foreign currency forward contract

Interest rate swap

Payable
Interest expense
Swap receivable/payable

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