ASC 815

Also known as: Derivatives and Hedging

framework · accounting · regulatory-standard

FASB topic governing recognition, measurement, and disclosure of derivative instruments and hedging activities.

ASC 815 (Derivatives and Hedging) is the FASB Accounting Standards Codification topic governing the recognition, measurement, presentation, and disclosure of derivative instruments and qualifying hedge accounting. It descends from SFAS 133 (1998), itself the culmination of a decade-long FASB project responding to off-balance-sheet derivative-related losses at firms including Procter & Gamble, Gibson Greetings, and Bankers Trust. The general principle is that all derivatives are recognized at fair value with changes in fair value recognized in earnings, except where qualifying hedge accounting permits deferral or other treatment. Three hedge designations exist: fair value hedges, cash flow hedges, and net investment hedges of foreign operations. Hedge designation requires contemporaneous documentation, prospective and retrospective effectiveness testing, and rigorous compliance with mechanical eligibility rules. ASU 2017-12 and subsequent updates simplified several of the most-criticized provisions.

Originators

Financial Accounting Standards Board (institutional originator); SFAS 133 (1998) issued under chair Edmund Jenkins; intellectual antecedents in post-1980s derivative-loss disclosures and the 1994-1996 derivatives controversy high

Year / Decade

1998 (SFAS 133 issued); 2009 (codified into ASC 815); 2017 (ASU 2017-12 simplification) high

Primary sources

FASB (1998). SFAS 133, Accounting for Derivative Instruments and Hedging Activities, FASB. ASC 815 (continuously updated codification), FASB (2017). ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities high

Core components

Definition of a derivative (notional, underlying, payment provision, net settlement, no or small initial net investment)
Embedded derivative bifurcation rules
Three hedge designations (fair value, cash flow, net investment)
Documentation and effectiveness testing requirements
Hypothetical derivative method, dollar-offset, regression analysis effectiveness techniques
Critical-terms-match qualitative effectiveness shortcut
Disclosure requirements including quantitative and qualitative tabular information

Primary use case

Recognition and measurement of corporate, financial-institution, and energy-trading derivative positions; qualifying hedge accounting treatment for interest rate, foreign currency, commodity, and equity hedges; input to risk management governance and treasury operations; disclosure framework for derivative-related risk in SEC filings.

Common criticisms

ASC 815 has been criticized since SFAS 133 was issued for complexity that deters legitimate hedging — surveys by FASB itself and by industry associations (notably the Derivatives Implementation Group's volume of guidance) documented the rule-set's documentation and effectiveness-testing burden as a frequent reason firms forgo hedge accounting and accept earnings volatility
the 'all or nothing' qualification (ineffective hedges receive no special treatment, including for partial-period ineffectiveness) was the explicit target of ASU 2017-12 simplifications, which were welcomed but did not address all complexity
differences from IFRS 9's hedge accounting model (more principles-based, broader risk-component eligibility, no quantitative effectiveness threshold) make cross-comparison difficult and impose dual-ledger costs on cross-listed entities
embedded derivative bifurcation produces high-cost analyses with frequently immaterial results
fair-value measurement of derivatives without observable market prices (Level 2 and 3 inputs) introduces estimation risk that PCAOB inspections have repeatedly highlighted as an area of audit concern
LIBOR transition (ASU 2020-04 and follow-ons) exposed how brittle hedge accounting designation can be to reference-rate change.

Lineage

Child of: US GAAP
Siblings: IFRS 9, ASC 606, ASC 842, ASC 805