Fair value hedge => G&L are recognized in the income statement. Cash flow hedge => G&L are reported in equity but eventually recognized in the income statement once the anticipated transaction affects earnings. Hedge of the net investement in a foreign subsidiary => G&L are recognized in the equity. I can’t understand the “logic” behind that. If I had to suggest something, I would say: Fair value (i.e. the balance sheet may be impacted) => equity (in the balance sheet) Cash flow edge (i.e. this is “more” income related) => income statement Is there someone to help on that?
I can imagine noone knows…
glendale, or any other FSA master, we need you here…
i think the easiest way to understand it is to remember that the whole point of the hedging rules is to reduce volatility in the p&l numbers. if you take a cash flow hedge - you have a derivative recorded as a balance sheet amount with the fair value movement going to the p&l.the derivative is hedging a future cash flow. as it is a future cash flow it is not recorded in the accounts. so even though you are perfectly hedged from an economical point of view you will still suffer volatillity in the p&l (derivative movements hit p&l but no movements on cash flows are recorded). the hedge accounting rules are there so the p&l movement on the derivative (only the effective portion) can be deferred to equity until the hedged transaction occurs. when it occurs the movement on the derivative that has been deferred is released from equity and matches against the cash flow transaction. if it is a perfect hedge there is then no impact on the p&l as both transaction net. for fair value hedges: hedged asset is already on balance sheet. derivative movement is already going to p&l. movement in fair value of hedged item is posted to p&l to match derivative movement. again if it is a perfect hedge there will be no net impact on p&l. there are a number of different types of fair value hedges: for securities held for trading - gains and losses on securities are posted to p&l anyway so no additional posting necessary. for afs securities - fair value movement posted to equity. hedge accounting rules allow the effective portion of the hedge to be posted from equity to p&l to ‘match’ against the derivative and reduce volatility in the p&l. hope this helps…
Fair value - the g/l offsets the g/l on the asset that is being hedged so it should net to zero CF - g/l of hedge accumulates in comp income until the transaction and then recognized on income statement so it should also net to zero Foreign currency - the g/l offsets the change in the CTA so the change in the CTA and hedge value should net to zero
It helps, thank you