Derivative (Hedging) Disclosures
and
Other Comprehensive Income
Doug Richardson, CPA
April, 2012
Derivatives (Hedging)
Disclosures
Derivative Instruments Defined
A derivative instrument is a financial
instrument or contract with all of the
following characteristics:
 Underlying commodity or transaction,
notional amount and payment provision
 No initial net investment or a small initial
net investment
 Contract can be settled net (liquidated
without delivery)
Accounting for Derivatives

All derivative instruments must be
marked to market on the balance sheet
each period except for forward purchase
contracts for which an exception is
elected

Electing hedge accounting affects the
presentation of the mark to market
adjustment
Normal Purchase and Normal Sale
Exception
Forward purchase contracts for which a
price is set are deemed to be derivatives and
are marked to market unless the scope
exception is used.
 There is a scope exception for contracts
that provide for the purchase or sale of
items that will be delivered and are part of
normal purchase and sales operations.
 Use of this scope exception must be
documented as part of accounting records
or the contracts will be considered subject
to mark-to-market derivative accounting

Hedging Treatment of Derivatives
Elect hedge accounting elected –
 Determine type of hedge – Fair Value or
Cash Flow
 Contemporaneous documentation must be
maintained of the hedging relationship of
each derivative contract entered into
 The hedges must be tested for effectiveness
and the testing must be documented in
accounting records
Hedge accounting not elected –
 Treat as undesignated positions
Fair Value Hedges
These derivative instruments address the
exposure to changes in the fair value of
an asset or liability (corn, oil, etc in inv)
 The gain/loss on mark to market is
presented as a component of period
income in the income statement
 The hedged asset or liability is likewise
stated at fair value through the income
statement.

Cash Flow Hedges


These derivative instruments address the
exposure to the variability in the cash flows
of a recognized asset or liability or a
forecasted transaction that is attributable to
a particular risk.
The gain/loss on mark to market is
presented as a component of accumulated
other comprehensive income. Gain/loss is
recognized in the income statement when
the forecasted transaction occurs
Undesignated Positions

No hedging relationship is documented
and hedge accounting is elected

The gain/loss from the mark to market
adjustments are presented in the income
statement for the period the change
occurred

No additional documentation is required
Qualitative Disclosures





Your objectives to be met through the use of
derivatives and your strategies for meeting those
objectives (what risks are being managed and how
your selected derivatives address those risks)
Any context needed to understand the objectives (if
one commodity is being hedged in lieu of another
commodity)
Descriptions of the derivatives designated as hedges
by hedge type (cash flow, fair value, or undesignated)
The purpose of derivatives not designated as hedges
Disclosure of the volume of hedging transactions in
units in addition to the dollar value.
Quantitative Disclosures



The location and gross fair value of
derivative instruments in the statement of
financial position
The location and gross amounts of the gains
and losses on derivative instruments and
related hedged items reported in the income
statement or the statement of financial
position if hedging has been elected.
Gross amounts of gains, losses and collateral
must be disclosed in the footnote even if
accounts are subject to a master netting
agreement
Fair Value Disclosures

The level of the fair value input (level I, level
II or level III) used must be disclosed for the
derivatives and hedged items stated at fair
value

The valuation techniques and inputs used to
develop the measurements of fair value must
be disclosed – with expanded information
on level II and level III instruments.
Other Comprehensive Income
Disclosure Update
Other Comprehensive Income (OCI)
represents the change in equity of a
business enterprise from non-owner
sources.
 OCI has historically been presented in
connection with statement of
stockholders’ equity or retained earnings.

Disclosure update (Cont’d)

Effective for fiscal years ending after
December 15, 2012 (for non-public
entities), the changes in other
comprehensive income must be disclosed
in a separate financial statement or as a
component of the income statement
Disclosure update (Cont’d)

Examples of common OCI items include:
a - Change in unrealized gain on
investment securities;
b - Foreign currency translation
adjustments;
c – Unrealized gain or loss of derivative
instruments designated as hedges (corn
futures, interest rate swaps, etc)
Disclosure update
Reclassification adjustments may be
required in order to avoid double
counting of items included in net income
for a given period for items (ie realized
gain on derivative contracts)
 The reclassification adjustments can be
disclosed either on the face of the
statement or in the notes. The amounts
can be either gross (on the statement or
net with amounts disclosed in the notes)

Statement Example


Net income
Other comprehensive income

Foreign currency translation adjustment (net of $100,000 tax)

Unrealized gain on marketable equity securities (net of $50,000 tax)

Unrealized loss on derivative instruments classified as cash flow


$ 5,000,000
hedges (net of $10,000 tax)
Comprehensive income
(120,000)
80,000
(65,000)
$ 4,895,000