What is ASC Topic 815?
Accounting for Derivatives and Hedging Activity ASC 815 requires a derivative to be recorded on the balance sheet as an asset or liability and to be measured at fair value. ASC 815 provides a characteristics-based definition of a derivative.
What is fair value hedge and cash flow hedge?
What’s the difference between cash flow hedge and fair value hedge? With a cash flow hedge, you’re hedging the changes in cash inflow and outflow from assets and liabilities, whereas fair value hedges help to mitigate your exposure to changes in the value of assets or liabilities.
What are fair value hedges?
A Fair Value Hedge is used when an entity is looking to eliminate or reduce the exposure that arises from changes in the fair value of a financial asset or liability (or other eligible exposure) due to changes in a particular risk, such as interest rate risk on a fixed rate debt instrument.
What is the purpose of hedging?
Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset. The reduction in risk provided by hedging also typically results in a reduction in potential profits.
What is a fair value hedge example?
What is a fair value hedge? Fair value hedges can be used to mitigate the risk of changes in the fair market value of liabilities, assets, or other firm commitments. As a result, derivatives like options and futures are great examples of fair value hedges.
What happens if a hedge is ineffective?
The ineffective portion of the change in the fair value of the hedging instrument (if any) is recognised directly in P&L. If the cumulative change in the hedging instrument is less than the change in the hedged item (sometimes referred to as an ‘under-hedge’), no ineffectiveness will be recognised.
What is an example of a cash flow hedge?
A cash flow hedge is designed to minimize the risk that a company will have to pay more than it expects. The gasoline example in the previous section is an example of a cash flow hedge. To mitigate this risk, you could buy some copper futures contracts, which would increase in value if the price of copper were to rise.
What is the difference between a fair value hedge and cash flow?
As you can see, the key difference between a cash flow hedge and a fair value hedge is the hedged item. With a cash flow hedge, you’re hedging the changes in cash inflow and outflow from assets and liabilities, whereas fair value hedges help to mitigate your exposure to changes in the value of assets or liabilities.
Who does ASC 740 apply to?
Subtopic 740-10 deals with all income tax positions; by definition, it does not apply to sales, use, property, intangible, or value-added taxes. It applies to any income tax in any jurisdiction, whether it is federal, state, local, or foreign income tax, and it applies to any entity that might be subject to income tax.
What is the purpose of ASC 740?
Accounting for income taxes (ASC 740) is a set of income tax standards requiring public companies to analyze and disclose income tax risks.
What do you need to know about ASC 815?
ASC 815, Derivatives and Hedging, allows for special accounting for qualifying hedges to help better align the accounting with the economics of the risk management strategy. ASC 815 provides for three different hedge types: In the remainder of this blog post, we will explore fair value hedging and cash flow hedging.
What are the requirements for cash flow hedge accounting?
All other requirements in Topic 815 for cash flow hedge accounting apply for the simplified hedge accounting approach. In addition, the current disclosure requirements in Topic 815 and Topic 820 on fair value measurement continue to apply for a swap accounted for under the simplified hedge accounting approach.
Can a simplified hedge accounting approach be used?
The simplified hedge accounting approach provides entities within the scope of this Update with a practical expedient to qualify for cash flow hedge accounting under Topic 815. Under this approach, an entity may assume no ineffectiveness for qualifying swaps designated in a hedging relationship under Topic 815.
Which is the latest edition of the KPMG Hedge Accounting Guide?
Latest edition: The KPMG in-depth guide to ASC 815 derivatives and hedge accounting post ASU 2017-02. This comprehensive update from KPMG adds guidance on the scope of ASC 815, the definition of derivative, accounting for derivatives and presentation to existing guidance on qualifying criteria and models to apply hedge accounting.