Accounting For Derivatives

All derivatives are measured and reported at fair value as assets or liabilities in the statement of financial position. Reporting of the corresponding changes in fair value depends upon management’s purpose for holding the derivative. Special accounting treatment is allowed for derivatives designated and qualifying as 1) a hedge of a risk of change in fair value of a recognized asset or liability or an unrecognized firm commitment (fair value hedge), 2) a hedge of the risk of a change in the cash flows associated with a recognized asset or liability or associated with a forecasted transaction (cash flow hedge), or 3) a hedge of a foreign currency exposure of an unrecognized firm commitment, an available for sale security, a forecasted transaction, or a net investment in a foreign operation (foreign currency hedge). Changes in fair value of derivatives not specifically designated as one of the above hedges are included in current earnings. Interest rate swaps are used to illustrate the difference between a cash flow hedge and fair value hedge. Swaps that are currently accounted for similarly require different accounting methods depending on the purpose for holding the swap.