Describe the accounting for a fair value hedge of a recognized asset or liability


Accounting for a Fair Value Hedge of a Recognized Asset or Liability

The following summarizes the accounting for a fair value hedge of a recognized asset or liability.

1 . A firm recognizes the hedged asset or liability, even in the absence of hedge accounting. In the absence of hedge accounting, the measurement of the hedged item depends on the required accounting for that item (for example, lower of cost or market for inventories, present value of future cash flows for long-term receivables and payables).

2 . On the date a firm enters the derivative contract and designates that contract as a fair value hedge, it recognizes the derivative as an asset if it makes an initial payment. It recognizes the derivative as a liability if it receives an initial payment. Otherwise, no amount appears on the balance sheet for the derivative.

3 . At the end of each period, the firm remeasures the hedged asset or liability to fair value and includes the resulting gain or loss in net income.

4 . At the end of each period, the firm remeasures the derivative instrument (hedging instrument) to fair value and includes the resulting loss or gain in net income.

5 . The firm reports both the hedged asset or liability and its related hedging instrument separately on the balance sheet without netting.

6 . When the firm settles the derivative contract and the hedged item, the firm removes the hedged asset or liability and its related derivative from the accounts.

Business

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