This free, guided checker walks your finance team through the key decision points for ASC 815-20 Hedge Accounting Qualification. Answer a few questions to see the likely treatment and the evidence to document.
Answer a few quick questions below. It is private - nothing is submitted or stored - and takes about a minute.
This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
ASC 815-20-25-45 limits eligible hedging instruments to derivatives and, for certain foreign currency exposures only, nonderivative financial instruments. Confirm the contract has not been carved out by a scope exception such as normal purchases and normal sales; an excepted contract is not a derivative and cannot be designated. A common trap is attempting to designate a written option, which faces additional restrictions in ASC 815-20-25 on when it may serve as a hedging instrument.
The instrument is not eligible to be designated as a hedging instrument under ASC 815-20-25-45.
Official guidance: FASB Accounting Standards Codification
The hedge type drives both the qualification tests and the accounting mechanics: fair value hedges adjust the hedged item's basis, cash flow hedges defer effective changes in accumulated other comprehensive income, and net investment hedges post effective changes to the cumulative translation adjustment. The type must be identified in the inception documentation and cannot be changed retroactively.
Without designation the derivative is measured at fair value with changes in earnings under ASC 815-10-35-2.
Official guidance: FASB Accounting Standards Codification
ASC 815-20-25-12 lists the eligibility criteria for hedged items and transactions, including the requirement that a forecasted transaction be probable and with an external party (with limited intercompany foreign currency exceptions). A frequent trap is designating a forecasted transaction described so broadly that occurrence cannot be verified; the documentation must be specific enough to identify the transaction when it occurs.
The exposure is not an eligible hedged item under ASC 815-20-25-12, so hedge accounting is unavailable.
Official guidance: FASB Accounting Standards Codification
ASC 815-20-25-3 requires formal designation and documentation at hedge inception; this is a bright-line condition, and regulators have required restatement where documentation was assembled after the fact. The documentation must specify the effectiveness assessment method that will be used both at inception and on an ongoing basis. The initial quantitative assessment, where required, generally must be completed by the first quarterly effectiveness testing date.
Without contemporaneous formal designation and documentation, hedge accounting is precluded under ASC 815-20-25-3.
Official guidance: FASB Accounting Standards Codification
ASC 815-20-25-75 through 25-80 require an expectation, at inception and on an ongoing basis, that the relationship will be highly effective in achieving offsetting changes attributable to the hedged risk. The method must match the facts: critical terms match and the shortcut method are narrow qualitative accommodations, while regression is the default when terms differ. Choosing an unsupported qualitative method is a leading cause of hedge accounting restatements.
Failure to specify the effectiveness assessment method in the inception documentation precludes hedge accounting under ASC 815-20-25-3.
Official guidance: FASB Accounting Standards Codification
ASC 815-20-25-84 permits a qualitative expectation of perfect offset when the critical terms of the derivative and the hedged item are the same. The comparison must be term-by-term and documented; any difference, including counterparty credit deterioration that could dominate the offset, requires moving to a quantitative method. Reverify that terms continue to match each period, since amendments or partial settlements break the match.
Use the interactive tool above to see how this applies to your situation.
Official guidance: FASB Accounting Standards Codification
The shortcut method in ASC 815-20-25-102 through 25-117 is available only for interest rate swaps hedging recognized interest-bearing assets or liabilities, and every enumerated condition must be met - there is no materiality threshold, and improper shortcut use historically required full reversal of hedge accounting. Under ASC 815-20-25-117A an entity may document a quantitative fallback method at inception to preserve hedge accounting if shortcut use is later found improper.
Use the interactive tool above to see how this applies to your situation.
Official guidance: FASB Accounting Standards Codification
ASC 815 does not define 'highly effective' numerically, but practice has converged on regression benchmarks such as an R-squared of 0.80 or higher with an appropriate slope. The dataset must be relevant to the hedged exposure, the methodology must be applied consistently with the inception documentation, and the assessment must be performed both prospectively and, where required, retrospectively. Changing the method requires a documented justification.
The relationship is not expected to be highly effective, so it does not qualify under ASC 815-20-25-75.
Official guidance: FASB Accounting Standards Codification
Qualification is not a one-time event: ASC 815-20-25-79 requires effectiveness to be assessed whenever financial statements or earnings are reported and at least every three months. Entities that performed an initial quantitative test may, in some cases, shift to qualitative ongoing assessments under ASC 815-20-35-2A if facts have not changed. Monitor forecasted transactions closely - a missed forecast can trigger immediate reclassification of amounts from accumulated other comprehensive income into earnings.
The relationship qualifies for hedge accounting; apply the mechanics for the designated hedge type and maintain the ongoing assessment cadence. Discontinue hedge accounting prospectively under ASC 815-30-40-1 through 40-5 (cash flow hedges) or ASC 815-25-40 (fair value hedges).
Official guidance: FASB Accounting Standards Codification
Send us your situation and one of our senior CPAs will review it with you - fixed fee, no surprises.
Contact Us