Derivatives Implementation Group

Statement 133 Implementation Issue No. G3

QUESTION

Should an entity continue to report in accumulated other comprehensive income a net derivative gain or loss related to a discontinued cash flow hedge of a forecasted transaction if the entity determines that it is probable that the forecasted transaction will not occur by the end of the originally specified time period but will occur shortly thereafter?

For example, on January 1, an entity enters into a cash flow hedge of the forecasted sale of the first 100 units of a specified product during the 3-month period from February 1 to April 30. Gains and losses on the hedging instrument are accumulated in other comprehensive income and reclassified into earnings as sales occur. However, as of March 10, only 60 units of the product have been sold and the entity determines that it is probable that the sale of the remaining 40 units will not occur by April 30. As a result, the entity must discontinue cash flow hedge accounting under the originally designated hedging relationship as of March 10 (pursuant to paragraph 32(a)). The entity determines that it is probable that the sale of the remaining 40 units will occur by June 20. (Based on this new information, the entity is permitted to designate a new cash flow hedge under which subsequent derivative gains and losses would receive cash flow hedge accounting.) The issue focuses on the derivative gains and losses that have been accumulated in other comprehensive income at March 10 with respect to the remaining 40 unsold units.

RESPONSE

The net derivative gain or loss related to the discontinued cash flow hedge should continue to be reported in accumulated other comprehensive income unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, except as indicated in the following sentence. In rare circumstances, the existence of extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of the reporting entity may cause the forecasted transaction to be probable of occurring on a date that is beyond the additional two-month period of time, in which case the net derivative gain or loss related to the discontinued cash flow hedge should continue to be reported in accumulated other comprehensive income until it is reclassified into earnings pursuant to paragraph 31. If it is probable that the hedged forecasted transaction will not occur either by the end of the originally specified time period or within the additional two-month period of time and the hedged forecasted transaction also does not qualify for the exception described in the preceding sentence, that derivative gain or loss reported in accumulated other comprehensive income should be immediately reclassified into earnings.

In the example described in the question section, the derivative gains or losses accumulated in other comprehensive income related to the sale of the remaining 40 units should not be reclassified into earnings as of March 10 because the entity determined on that date that it is at least reasonably possible that the forecasted transactions will occur within the two-month period following April 30 (the end of the originally specified time period).

In contrast, had the example indicated that the entity had determined on March 10 that it is probable that the sale of the remaining 40 units will not occur by June 30 but it was reasonably possible that the sale would occur in July or August, the accounting would be different. Under that revised example, the derivative gains or losses accumulated in other comprehensive income related to the sale of the remaining 40 units must be reclassified into earnings as of March 10 because the entity would have determined on that date that it is probable that the forecasted transactions will not occur by the end of the originally specified time period (that is, April 30) nor within the allowable additional two-month period of time (ending on June 30). Furthermore, the example indicates no extenuating circumstances that could justify applying the exception related to a forecasted transaction that is probable of occurring on a date beyond the additional two-month period of time. (Paragraph 45(b)(4) also requires disclosure of the amount of gains and losses reclassified into earnings as a result of the discontinuance of cash flow hedges due to it being probable that the original forecasted transactions will not occur.)

Derivative gains and losses that had initially been reported in other comprehensive income as a result of a cash flow hedge and then reclassified to earnings (because the entity subsequently concluded that it was probable that the forecasted transaction would not occur within the originally specified time period or the additional period of time described above) cannot later be reclassified out of earnings and back into accumulated other comprehensive income due to a reassessment of probabilities.

As indicated in paragraph 494 of Statement 133, a pattern of determining that hedged forecasted transactions are probable of not occurring by the end of the originally specified time period or within the additional two-month period of time thereafter will call into question an entity's ability to accurately predict forecasted transactions and the propriety of applying hedge accounting for similar forecasted transactions in the future.

The above response has been authored by the FASB staff and represents the staff's views, although the Board has discussed the above response at a public meeting and chosen not to object to dissemination of that response. Official positions of the FASB are determined only after extensive due process and deliberation.