In short
A cash flow hedge protects against variability in future cash flows of a recognized asset or liability or a forecasted transaction. Changes in the hedging instrument's fair value go to other comprehensive income until the hedged item affects earnings.
Key takeaways
- Hedges of forecasted transactions can only be cash flow hedges.
- Amounts are reclassified into earnings in the same period, and income statement line, as the hedged item.
- Hedge accounting requires formal documentation at inception.
Where it's tested
BAR: Derivatives & Hedge Accounting — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company with variable-rate debt enters into an interest rate swap to pay fixed and receive variable, properly designated and documented as a hedge. Where are changes in the swap's fair value reported?