For a fair value hedge to qualify for hedge accounting, the exposure to changes in the hedged item’s fair value attributable to the hedged risk must have the potential to affect reported earnings. Examples of eligible exposures (i.e., hedged items) may include fixed-interest-rate assets or liabilities, inventory on hand, foreign-currency-denominated assets or liabilities, a portion of a closed portfolio of prepayable financial assets (or one or more beneficial interests secured by a portfolio of prepayable financial instruments), or a fixed-price firm commitment.
Generally speaking, an entity with a fair value hedge that meets all of the hedging criteria in ASC 815 would record the change in the derivative’s (i.e., hedging instrument’s) fair value in current-period earnings. It would also adjust the hedged item’s carrying amount by the amount of the change in the hedged item’s fair value that is attributable to the risk being hedged. The adjustment to the hedged item’s carrying amount would also be recorded in current-period earnings. For fair value hedges, both the change in the hedging instrument’s fair value and the change in the hedged item’s carrying amount are presented in the same income statement line item and should be related to the risk being hedged. As a result of applying hedge accounting in a qualifying fair value hedging relationship, an entity accelerates the income statement recognition of the impact of changes on the hedged item that are attributable to the hedged risk. Accordingly, the entity recognizes the changes in the same period as the changes in the derivative’s fair value.