19.5 Disclosure

The disclosure guidance in ASC 815 applies to all interim and annual reporting periods for which a balance sheet (for balance sheet related disclosures) and income statement (for income statement related disclosures) are presented.

If information on derivatives (or nonderivative instruments that qualify and are designated as hedging instruments) is disclosed in more than one footnote, the reporting entity should cross-reference the derivative footnote to any other applicable footnotes.

Figure FSP 19-1provides a mapping of some of the disclosure requirements in the authoritative guidance to the relevant sections in the guide.

19.5.1 Disclosure objectives

ASC 815-10-50-1provides three primary disclosure objectives for a reporting entity's activity in derivative and nonderivative instruments that are designated and qualify as hedging instruments. Those objectives are to disclose information to help financial statement users understand:

• How and why a reporting entity uses derivatives
• How derivatives and related hedging items are accounted for
• How derivatives and related hedging activities affect a reporting entity’s financial position, financial performance, and cash flows

In addition, as described in ASC 815-10-50-1A, a reporting entity that holds or issues derivatives (or nonderivative instruments that are designated and qualify as hedging instruments) should describe in the footnotes the objective, context, and strategies for issuing or holding derivatives. It also requires reporting entities to disclose information that enables users to understand the volume of activity of those instruments, as discussed in FSP 19.5.3. The purpose of these disclosures is to enhance the overall transparency of a reporting entity's derivative activity by helping stakeholders understand how and why a reporting entity uses derivatives and evaluate the success of those activities, their importance to the reporting entity, and their effect on the financial statements.

As discussed in ASC 815-10-50-2, 50-5, and 50-5A, the qualitative disclosures may be more meaningful if described in the context of a reporting entity's overall risk-management profile. The quantitative disclosures may be more meaningful if similar information is disclosed about other financial instruments or nonfinancial assets and liabilities to which the derivatives are related by activity. The reporting entity should clearly delineate objectives and strategies for derivatives used for risk management purposes and those used for other purposes (at a minimum based on the instruments' primary underlying risk exposure, such as interest rate risk or credit risk).

• The accounting designations of derivative instruments (e.g., cash flow hedging, fair value hedging, and net investment hedging relationships)
• Information by type of risk being hedged (e.g., interest rate, commodity price risk, foreign currency)

When hedge accounting is material, we believe a reporting entity should include disclosures that describe the specific methodology used to test hedge effectiveness for each type of hedge (other than economic hedges).

19.5.2 Accounting policy disclosures

ASC 235, Notes to Financial Statements, requires reporting entities to disclose significant accounting policies. Disclosures of accounting policies specifically required by ASC 815 include the following.

• ASC 815-10-50-4EEEE requires disclosure of the election to record changes in fair value of excluded components in current period earnings (as further discussed in DH 6.3.1.2 and DH 7.2.1.3), as opposed to amortizing the excluded components using a systematic and rational method. While the guidance is specific to fair value and cash flow hedges, we believe a similar disclosure should be made for net investment hedges.
• ASC 815-10-50-7 requires disclosure of the reporting entity’s accounting policy to offset or not to offset in accordance with ASC 815-10-45-6.
• ASC 815-10-50-9 requires disclosure of the reporting entity’s accounting policy for the premium paid to acquire options (that do not meet the definition of a derivative) classified as held to maturity or available for sale.

We also believe reporting entities should disclose their accounting policies if significant regarding:

• Income statement presentation of economic hedges (see FSP 19.4.4)
• Income statement presentation of gains and losses on excluded components in net investment hedges (see FSP 19.4.3)
• Balance sheet classification of derivatives (see FSP 19.3.1)
• Statement of cash flows treatment of derivatives (see FSP 6.7.1.5 and FSP 6.7.2.9)

Regulation S-X 4-08(n) prescribes minimum required disclosures for SEC registrants, when material, if they are not already disclosed under GAAP.

Disclosures regarding accounting policies shall include descriptions of the accounting policies used for derivative financial instruments and derivative commodity instruments, and the methods of applying those policies that materially affect the determination of financial position, cash flows or results of operation. This description shall include, to the extent material, each of the following items:

1. A discussion of each method used to account for derivative financial instruments and derivative commodity instruments;
2. The types of derivative financial instruments and derivative commodity instruments accounted for under each method;
3. The criteria required to be met for each accounting method used, including a discussion of the criteria required to be met for hedge or deferral accounting and accrual or settlement accounting (e.g., whether and how risk reduction, correlation, designation, and effectiveness tests are applied);
4. The accounting method used if the criteria specified in paragraph (n)(3) of this section are not met;
5. The method used to account for terminations of derivatives designated as hedges or derivatives used to affect directly or indirectly the terms, fair values, or cash flows of a designated item;
6. The method used to account for derivatives when the designated item matures, is sold, is extinguished, or is terminated. In addition, the method used to account for derivatives designated to an anticipated transaction, when the anticipated transaction is no longer likely to occur; and
7. Where and when derivative financial instruments and derivative commodity instruments, and their related gains and losses, are reported in the statements of financial position, cash flows, and results of operations.

19.5.3 Volume of derivative activity

ASC 815-10-50-1A(d) requires disclosure about the volume of derivative activity. The format and specifics of these disclosures should be what is most relevant and practicable for the reporting entity’s individual facts and circumstances. This might include the total notional amount of interest rate derivatives outstanding during a period, described and segregated in a meaningful way to allow a user to understand the gross or net financial implications.

This disclosure should include other directional information about the reporting entity’s derivative positions (e.g., distinguishing receive-fixed interest rate swaps from pay-fixed interest rate swaps) in the context of each instrument’s primary underlying risk exposure (for example, interest rate, credit, foreign exchange rate, interest rate and foreign exchange rate, or overall price).

19.5.4 Tabular disclosures

ASC 815-10-50-4A requires certain disclosures related to derivatives and hedging on the balance sheet and in the income statement (and in other comprehensive income) in a tabular format.

1. The location and fair value amounts of derivative instruments (and such nonderivative instruments) reported in the statement of financial position
2. The location and amount of the gains and losses on derivative instruments (and such nonderivative instruments) and related hedged items reported in any of the following:

1. The statement of financial performance.

2. The statement of financial position (for example, gains and losses initially recognized in other comprehensive income).

The FASB decided to prescribe a tabular format as it believed that using tables would improve the transparency of the disclosure and would help financial statement users understand the effects of derivatives on a reporting entity’s balance sheet, income statement, statement of comprehensive income, and statement of cash flows. See ASC 815-10-55-181 and ASC 815-10-55-182 for example disclosures.

The fair values of the derivatives included in the tabular disclosure should be prepared using gross fair value amounts, even though their presentation in the balance sheet may be affected by applicable master netting arrangements and credit support arrangements with collateral not deemed a settlement (as discussed in FSP 19.3.2). Also, cash collateral payables and receivables associated with those instruments should not be added to or netted against the fair value amounts. The disclosure requirements for reporting entities that elect to net derivatives in the balance sheet are discussed in FSP 19.5.7.

Because ASC 815 requires the tabular disclosure to be prepared on a gross basis that disregards the effect of netting arrangements and collateral positions not deemed settlements, it is possible that individual amounts included in the disclosure will not agree with the amounts presented in the balance sheet. The FASB accepted this potential inconsistency because disclosing information on a net basis could provide misleading information about the types of risks being managed with derivatives.

A reporting entity that has multiple derivatives with a single counterparty subject to a master netting arrangement may incorporate certain risks (e.g., nonperformance risk) into its valuation of the derivatives at the portfolio level. A reasonable allocation of those portfolio level adjustments may be necessary for purposes of preparing the contract-level tabular disclosures.

ASC 815-10-50-4D requires segregation by type of hedge and by major type of instrument: interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts, other contracts. In addition, ASC 815-10-50-4B(c) requires derivative assets and liabilities should be segregated between those that are designated and qualifying as hedging instruments (FSP 19.5.4.1 through FSP 19.5.4.5) and those that are not (FSP 19.5.4.6). When segregating derivative assets and liabilities, a reporting entity should consider the classification within the classified balance sheet (i.e., current versus noncurrent). Also, if a proportion of a derivative is designated in a qualifying hedging relationship and a proportion is not designated, ASC 815-10-50-4E indicates that the reporting entity should allocate the related amounts to the appropriate categories in the disclosure tables.

Although not required by ASC 815, reporting entities may wish to enhance these tabular disclosures by including a reconciliation of the amounts in the table to the amounts in the balance sheet.

19.5.4.1 Balance sheet information-fair value hedges

ASC 815-10-50-4EE requires disclosure of balance-sheet-related information in tabular format for fair value hedges.

1. The carrying amount of hedged assets and liabilities recognized in the statement of financial position. For an available for sale debt security, the amount disclosed is the amortized cost basis.
2. The cumulative amount of fair value hedging adjustments to hedged assets and liabilities included in the carrying amount of the hedged assets and liabilities recognized in the statement of financial position
3. The line item in the statement of financial position that includes the hedged assets and liabilities
4. The cumulative amount of fair value hedging adjustments remaining for any hedged assets and liabilities for which hedge accounting has been discontinued.

Example 20 in ASC 815-10-55-181 illustrates through footnote (a) that portfolio layer method hedges (discussed in DH 6.5) are included in the total amounts in this disclosure as well as broken out separately in disclosures required by ASC 815-10-50-4EEE.

ASC 815-10-50-4EE(a) includes the total carrying amount (inclusive of basis adjustments) of all active fair value hedged items and discontinued fair value hedged items on which a basis adjustment still remains. Although 50-4EE(a) is for “designated and qualifying [hedges], because ASC 815-10-50-4EE(d) requires disclosure of the basis adjustment on discontinued hedges, we believe the carrying amount disclosure should include them as well.

For nonderivative instruments that are designated and qualify as hedging instruments of foreign currency risk under ASC 815-20-25-58, the carrying value of the instrument should be included in the tabular disclosure, inclusive of any foreign currency transaction gain or loss on the instrument.

If a proportion of an asset or liability is hedged (e.g., 50% of a debt instrument), we believe the carrying amount should be that proportion of the total carrying amount. This would require allocating components of amortized cost. While ASC 815 does not explicitly discuss allocation of portions of hedged items, 50-4EE(a) indicates that the carrying amount disclosed should relate to hedged assets/liabilities, and therefore should exclude any portion of the asset/liability not hedged, similar to the concept in ASC 815-10-50-4E (discussed in FSP 19.5.4) that explicitly references including a proportion of the hedging derivative.

For portfolio layer method hedges, the carrying value included in this disclosure is the amortized cost basis of the entire closed portfolio (or portfolios). This is not the same as the general principle that the carrying value disclosure only includes the proportion of the asset or liability hedged because in portfolio layer method hedges, the reporting entity will not know which assets will comprise the last layer(s).

When an available-for-sale debt security is hedged, the carrying amount per the ASC 815-10-50-4EE(a) disclosure is its amortized cost basis (inclusive of the basis adjustment), not its fair value.

This disclosure includes the cumulative basis adjustments (that do not impact cash flows – see below) made to the carrying values of hedged items in active hedges and hedges that have been discontinued on which a basis adjustment remains. (The basis adjustment on discontinued hedges is separately disclosed in ASC 815-10-50-4EE(d).)

Example FSP 19-3illustrates disclosure of basis adjustments on a fair value hedging relationship that is dedesignated and redesignated.

For the purposes of this example, the difference between the par amount of the instrument and its carrying amount is due to basis adjustments associated with fair value hedges.

Cumulative amount of fair value hedging adjustments to hedged assets and liabilities included in the carrying amount of the hedged assets and liabilities recognized on the balance sheet

The basis adjustment disclosure only includes basis adjustments that do not affect future cash flows on the hedged item. As a result, basis adjustments from fair value hedges of foreign exchange risk would not be included while basis adjustments due to fair value hedges of interest rate risk would be included. However, the carrying amount of the hedged items in fair value hedges of foreign exchange risk would be included in the disclosure in ASC 815-10-50-4EE(a).

We believe reporting entities should split the basis adjustment in hedges of both interest rate and foreign currency risk into the parts that adjusted the carrying value due to (1) the interest rate risk hedge and (2) the foreign currency risk hedge. One way to do that is to subtract from the total basis adjustment what ASC 830 would adjust for without hedge accounting (i.e., only include in the disclosure the "cumulative amount of [true] fair value hedging adjustments").

This disclosure includes the cumulative basis adjustments made to the carrying values of hedged items in hedges that have been discontinued on which a basis adjustment remains. (The total basis adjustment on is disclosed in ASC 815-10-50-4EE(b).)

Consistent with the basis adjustment disclosure for active hedges, basis adjustments on discontinued fair value hedges of foreign exchange risk would not be included while basis adjustments on discontinued fair value hedges of interest rate risk would be.

Similar to active hedges, for discontinued hedges of both interest rate and foreign currency risk, we believe reporting entities should split the basis adjustment into the parts that adjusted the carrying value due to (1) the interest rate risk hedge and (2) the foreign currency risk hedge. One way to do that is to subtract from the total basis adjustment what ASC 830 would adjust for without hedge accounting (i.e., only include in the disclosure the "cumulative amount of [true] fair value hedging adjustments").

19.5.4.2 Balance sheet information—portfolio layer method hedges

This chapter assumes adoption of ASU 2022-01. Additional disclosures are required by ASC 815-10-50-4EEE for fair value hedging relationships designated under the portfolio layer method approach. Consistent with the disclosures in ASC 815-10-50-4EE for all fair value hedges, we believe this disclosure should include all active and discontinued portfolio layer method hedges.

This disclosure need not be in tabular format. In Example 20 in ASC 815-10-55-181, the information is in a footnote to the table.

1. The amortized cost basis of the closed portfolio(s) of financial assets or the beneficial interest(s)
2. The amount that represents the hedged item(s) (that is, the hedged layer or layers)
3. The basis adjustment associated with the hedged item(s) (that is, the hedged layer or layers).

In addition, ASC 815-10-50-5B states that reporting entities should not disclose the basis adjustment on a more disaggregated level than the closed portfolio level, including when meeting the disclosure requirements of other codification Topics. The only exception to this is if disaggregation is required under ASC 815-20-45-4 because the closed portfolio includes assets that are reported on different line items on the balance sheet. If disclosure requirements pertaining to the underlying assets in the closed portfolio require disclosure of the amortized cost basis on a disaggregated level, reporting entities should exclude the basis adjustment associated with the portfolio layer method hedge from the amortized cost basis of those assets, and separately disclose the total amount of portfolio layer method basis adjustments.

In the event of an actual breach (because the outstanding amounts of the closed portfolio are less than the hedged layer(s)), the corresponding amount of the portfolio layer basis adjustment is required to be recognized in interest income (see DH 10.3.8). ASC 815-10-50-5C requires disclosure of the amount of the hedge basis adjustment that was recognized in earnings in the current period, and the circumstances that led to the breach.

Example FSP 19-4 illustrates the requirements in ASC 815-10-50-4EE(a) and ASC 815-10-50-4EE(b) and ASC 815-10-50-4EEE if the only hedging relationship is a portfolio layer method hedge.

Assume DH Corp has one hedging relationship, a portfolio layer method hedge with the following facts.

• The hedged item is a closed portfolio of loans that are reported in a single line item on the balance sheet.
• Carrying amount of entire closed portfolio: $502 ($500 amortized cost basis of the individual loans without considering any basis adjustments + $2 of basis adjustments)
• Hedged balance (portfolio layer method): $100
• Basis adjustment: $2

What disclosures are required under ASC 815-10-50-4EE and ASC 815-20-50-4EEE pertaining to this hedge?

Cumulative amount of fair value hedging adjustments to hedged assets and liabilities included in the carrying amount of the hedged assets and liabilities recognized on the balance sheet

19.5.4.3 Balance sheet information—cash flow hedges

1. Subparagraph not used
2. A description of the transactions or other events that will result in the reclassification into earnings of gains and losses that are reported in accumulated other comprehensive income
3. The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive income at the reporting date that is expected to be reclassified into earnings within the next 12 months
4. The maximum length of time over which the entity is hedging its exposure to the variability in future cash flows for forecasted transactions excluding those forecasted transactions related to the payment of variable interest on existing financial instruments

ASC 815-30-50-5 and ASC 815-30-50-6 provide guidance for determining the amount of gains and losses that will be reclassified into net income in the next 12 months for hedging relationships with multiple cash flow exposures that are designated as the hedged item for a single derivative. It indicates that the total amount reported in OCI should first be allocated to each of the forecasted transactions. The allocation method should be consistently applied. The sum of the amounts expected to be reclassified into net income in the next 12 months for each of those items would then be the amount disclosed, which could result in an amount greater than or less than the net amount reported in OCI.

A reporting entity should report, as a separate classification within OCI, (1) the net gain or loss on derivatives designated and qualifying as cash flow hedging instruments that are reported in OCI and (2) the difference between the change in fair value of an excluded component and the initial value of that excluded component recognized in earnings under a systematic and rational method for all hedges, in addition to the disclosure requirements associated with OCI, as described in FSP 4.5.

Reporting entities should also separately disclose a rollforward of the activity for such net gains and losses that are deferred through OCI pursuant to ASC 220, Comprehensive Income (as described in ASC 815-30-50-2).

1. The beginning and ending accumulated derivative instrument gain or loss
2. The related net change associated with current period hedging transactions
3. The net amount of any reclassification into earnings
4. The difference between the change in fair value of an excluded component and the initial value of that excluded component recognized in earnings under a systematic and rational method in accordance with paragraph 815-20-25-83A.

See an example of an OCI rollforward in Example 12 in ASC 815-30-55-77 through ASC 815-30-55-80. Additionally, while ASC 815-30-50-2(b) only requires the net change associated with current period hedging activity, reporting entities may wish to enhance these disclosures by providing this information by type of derivative contract.

19.5.4.4 Gains/losses—fair value and cash flow hedges

ASC 815-10-50-4C includes the tabular disclosure requirements for income statement and comprehensive income information pertaining to derivative and nonderivative instruments designated and qualifying as fair value and cash flow hedges. The required disclosures include the location and amount of gains and losses on both the hedging instrument and hedged item (as indicated by the reference to ASC 815-10-50-4A), when applicable, by type of contract (interest rate contracts, foreign exchange contracts, commodity contracts, credit contracts, other contracts) and by income and expense line item when applicable.

For qualifying fair value and cash flow hedges, the gains and losses disclosed pursuant to paragraph 815-10-50-4A(b) shall be presented separately for all of the following by type of contract (as discussed in paragraph 815-10-50-4D) and by income and expense line item (if applicable):

a. Derivative instruments (and nonderivative instruments) designated and qualifying as hedging instruments in fair value hedges and related hedged items designated and qualifying in fair value hedges.

b. The gains and losses on derivative instruments designated and qualifying in cash flow hedges included in the assessment of effectiveness that were recognized in other comprehensive income during the current period.

bb. Amounts excluded from the assessment of effectiveness that were recognized in other comprehensive income during the period for which an amortization approach is applied in accordance with paragraph 815-20-25-83A.

c. The gains and losses on derivative instruments designated and qualifying in cash flow hedges that are included in the assessment of effectiveness and recorded in accumulated other comprehensive income during the term of the hedging relationship and reclassified into earnings during the current period.

d. The portion of gains and losses on derivative instruments designated and qualifying in fair value and cash flow hedges representing the amount, if any, excluded from the assessment of hedge effectiveness that is recognized in earnings. When disclosing this amount, an entity shall disclose separately amounts that are recognized in earnings through an amortization approach in accordance with paragraph 815-20-25-83A and amounts recognized through changes in fair value in earnings in accordance with paragraph 815-20-25-83B.

e. Subparagraph superseded by Accounting Standards Update No. 2017-12

f. The gains and losses reclassified into earnings as a result of the discontinuance of cash flow hedges because it is probable that the original forecasted transactions will not occur by the end of the originally specified time period or within the additional period of time discussed in paragraphs 815-30-40-4 through 40-5.

g. The amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge.

Consistent with the balance sheet disclosures, we believe the income statement and comprehensive income disclosure should include all active fair value hedges and discontinued fair value hedges that still impact the income statement (through amortization of remaining basis adjustments).

• Change in fair value of the derivative or nonderivative (ASC 815-10-50-4A(b) and ASC 815-10-50-4C(a))
• Change in fair value of the hedged item (or change due to the hedged risk) (ASC 815-10-50-40A(b))
• Accruals on the hedged item and hedging derivative or nonderivative (ASC 815-10-50-4A(b) and ASC 815-10-50-4C(a))
• Amortization of basis adjustments (ASC 815-10-50-4A(b) and ASC 815-10-50-4C(a))
  • All basis adjustments should be included. For active hedges, basis adjustments and amortization may be recorded together (i.e., the "FAS 138" method includes amortization) or separately (i.e., the "FAS 120(c)" method with separate amortization elected).
  Cash flow hedges

  Consistent with the balance sheet disclosures, we believe the income statement and comprehensive income disclosure includes all active cash flow hedges and discontinued cash flow hedges that still impact OCI or the income statement.

  It should include all income statement (and OCI) impacts from cash flow hedges by line item:
  • Change in fair value of the derivative deferred through OCI, including accruals (ASC 815-10-50-4A and ASC 815-10-50-4C(b))
  • Accruals on the hedged transaction (ASC 815-10-50-4A and ASC 815-10-50-4C(b))
  • Excluded components deferred through OCI using an amortization approach (ASC 815-10-50-4C(bb))
  • Reclasses of gains/losses on derivatives from AOCI to earnings (ASC 815-10-50-4C(c))
  • Mark-to-market and amortization of excluded components in earnings, presented separately (ASC 815-10-50-4C(d))
  • Reclassifications of amounts in AOCI into earnings for discontinued hedges when the forecasted transaction is probable of not occurring (ASC 815-10-50-4C(f))

  19.5.4.5 Gains/losses—net investment hedges

  ASC 815-10-50-4CCC prescribes tabular disclosure of all of the following for derivative and nonderivative instruments designated and qualifying as net investment hedges by type of contract.

  1. The gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges that were recognized in the cumulative translation adjustment section of other comprehensive income during the current period
  2. The gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges recorded in the cumulative translation adjustment section of accumulated other comprehensive income during the term of the hedging relationship and reclassified into earnings during the current period
  3. The portion of gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges representing the amount, if any, excluded from the assessment of hedge effectiveness.

  Also, ASC 815-10-50-4A requires disclosure of the location and amount of gains and losses on both the hedging instrument and hedged item, when applicable, by type of contract and by income and expense line item when applicable. (ASC 815-10-50-4D(b) also requires disclosure of the line item in the income statement where gains and losses on net investment hedges are included.) Further, consistent with the requirement to disclose the location of gains and losses on hedging in the income statement in ASC 815-10-50-4A, reporting entities should also disclose the location in the income statement of the excluded components in net investment hedges recognized in income in the period.

  19.5.4.6 Non-qualifying or non-designated derivatives

  In accordance with ASC 815-10-50-4CC, a reporting entity should separately disclose by type of contract the amount of gains and losses related to derivatives not qualifying or designated as hedging instruments and the income statement line item in which they are included in a tabular format.

  A reporting entity may elect a policy to include certain derivatives in its trading activities. The reporting entity’s trading portfolio may include derivatives and cash instruments. In this situation, ASC 815-10-50-4F permits the reporting entity to not separately disclose gains and losses relating to these activities.

  1. The gains and losses on its trading activities (including both derivative instruments and nonderivative instruments) recognized in the statement of financial performance, separately by major types of items, for example:
     1. Fixed income/interest rates
     2. Foreign exchange
     3. Equity
     4. Commodity
     5. Credit.

     The FASB intends these disclosures to assist investors and creditors in understanding a reporting entity’s objectives for all of its derivatives. As noted in FSP 19.5.1, when derivatives are used as economic hedges of assets or liabilities, preparers are required to disclose the purpose of the derivative activity. Further, we believe a reporting entity should disclose its accounting policy regarding the presentation of economic hedges, including where the gains or losses are presented in the income statement and the amounts for each period.

     19.5.5 Credit-risk-related contingent features

     ASC 815-10-50-4H provides the disclosure requirements related to credit-risk-related contingent features.

     An entity that holds or issues derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose all of the following for every annual and interim reporting period for which a statement of financial position is presented:

     1. The existence and nature of credit-risk-related contingent features
     2. The circumstances in which credit-risk-related contingent features could be triggered in derivative instruments (or such nonderivative instruments) that are in a net liability position at the end of the reporting period
     3. The aggregate fair value amounts of derivative instruments (or such nonderivative instruments) that contain credit-risk-related contingent features that are in a net liability position at the end of the reporting period
     4. The aggregate fair value of assets that are already posted as collateral at the end of the reporting period
     5. The aggregate fair value of additional assets that would be required to be posted as collateral if the credit-risk-related contingent features were triggered at the end of the reporting period.
     6. The aggregate fair value of assets needed to settle the instrument immediately if the credit-risk-related contingent features were triggered at the end of the reporting period.

     19.5.6 Credit derivatives

     The seller or writer of a credit derivative is the party that assumes credit risk, which could be either a guarantor in a guarantee-type contract or any party that provides the credit protection in an option-type contract, a credit default swap, or any other credit derivative. For each balance sheet presented, the seller of credit derivatives (e.g., credit default swaps, credit spread options, credit index products) should disclose the information in ASC 815-10-50-4K for each credit derivative (or each group of similar credit derivatives) and hybrid instrument that has an embedded credit derivative. These disclosures are required even if the likelihood of the seller having to make payment under the credit derivative is remote.

     1. The nature of the credit derivative, including all of the following:
        1. The approximate term of the credit derivative
        2. The reason(s) for entering into the credit derivative
        3. The events or circumstances that would require the seller to perform under the credit derivative
        4. The current status (that is, as of the date of the statement of financial position) of the payment/performance risk of the credit derivative, which could be based on either recently issued external credit ratings or current internal groupings used by the seller to manage its risk
        5. If the entity uses internal groupings for purposes of item (a)(4), how those groupings are determined and used for managing risk.
        1. The maximum potential amount of future payments (undiscounted) that the seller could be required to make under the credit derivative, which shall not be reduced by the effect of any amounts that may possibly be recovered under recourse or collateralization provisions in the credit derivative (which are addressed in items (c) through (f))
        2. The fact that the terms of the credit derivative provide for no limitation to the maximum potential future payments under the contract, if applicable
        3. If the seller is unable to develop an estimate of the maximum potential amount of future payments under the credit derivative, the reasons why it cannot estimate the maximum potential amount.

        We believe the disclosures required by ASC 815-10-50-4K are also applicable to investments classified as trading and investments classified as available-for-sale. Therefore, investors should maintain an inventory of all investments in beneficial interests, including trading securities and those for which the fair value option has been applied. This inventory can be used to determine whether the investors are sellers of credit derivatives as a result of their investment, and thus subject to the disclosure requirements in ASC 815-10-50-4K.

        When hybrid instruments have embedded credit derivatives, the seller of the embedded credit derivative should disclose the information for the entire hybrid instrument, not just the embedded feature.

        According to ASC 815-10-50-4L, one way to present the information on credit derivatives would be to segregate the disclosures by major types of contract, and then within each type, provide subgroups for the major types of referenced (or underlying) asset classes.

        We believe reporting entities should consistently apply a meaningful aggregation methodology for disclosing this information. That will enable financial statement users to understand, at a reasonable level of detail, the amount of credit risk the reporting entity is exposed to due to these instruments.

        In certain situations, a reporting entity may engage in other risk management activities that could offset its maximum potential exposure. For example, a reporting entity may manage its risk on a net basis, or its derivatives may be subject to master netting arrangements that it uses to manage exposure to certain risks across multiple types of derivatives. In such instances, we believe reporting entities should consider providing additional disclosure that provides appropriate context for the disclosure of maximum potential future payments.

        In traditional credit-linked notes, the repayment of note principal to the investor/credit derivative seller is not required upon default of the referenced obligation. Thus, the investor is exposed to the credit risk of both the issuer and the referenced obligation. Because the seller does not make any physical cash payment under the terms of the embedded credit derivative, questions have arisen as to whether disclosure of the maximum potential amount of future payments is required for credit-linked notes. Given the FASB’s intent to provide users with similar informative disclosures for instruments with similar economic risks, we believe reporting entities should disclose the outstanding principal balance as the maximum amount of future payments, consistent with the economics of the hybrid instrument. That is, if the seller of the credit derivative were to forgo the principal amount due under the host contract, it may be viewed as “paying” to the insured party the host note principal upon default of the referenced obligation.

        The disclosure requirements do not apply to embedded derivative features relating to the transfer of credit risk that are in the form of subordination of one financial instrument to another (i.e., when the subordination scope exception in ASC 815-15-15-9 applies). Therefore, an investor in, or issuer of, beneficial interests in a fully-funded cash vehicle would not be subject to these disclosures if there were no other written credit derivatives present in the vehicle.

        19.5.7 Disclosure of offsetting of derivatives

        A reporting entity should disclose its policy of entering into master netting arrangements to mitigate the credit risk of financial instruments. It should also disclose information about the arrangements to which the reporting entity is party and a brief description of the terms, including the extent to which they would reduce the reporting entity’s maximum amount of loss due to credit risk. Reporting entities should describe the rights of setoff associated with their recognized assets and liabilities that are subject to an enforceable master netting arrangement or similar agreement, including the nature of those rights. Additionally, reporting entities may conclude that other qualitative disclosures are necessary for fulsome disclosure of the use of offsetting.

        A reporting entity may make an accounting policy election to offset derivatives, including cash collateral (see FSP 19.3.2.2). The disclosures required in ASC 815-10-50-8 vary depending on the netting election.

        1. A reporting entity that has made an accounting policy decision to offset fair value amounts shall separately disclose amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral that have been offset against net derivative positions.
        2. A reporting entity shall separately disclose amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting arrangements that have not been offset against net derivative instrument positions.
        3. A reporting entity that has made an accounting policy decision to not offset fair value amounts shall separately disclose the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting arrangements.

        Refer to FSP 2.4 for general presentation requirements related to balance sheet offsetting and FSP 19.3 for balance sheet presentation requirements specific to derivatives.

        In addition to the disclosure requirements in ASC 815, ASC 210-20-50-1 through ASC 210-20-50-6 provides the balance sheet offsetting disclosure requirements for derivatives (including separated embedded derivatives), repurchase agreements, reverse repurchase agreements, securities borrowing, and securities lending transactions.

        These disclosures require the presentation of gross and net information about transactions that are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement, regardless of whether the transactions are actually offset in the balance sheet.

        For these types of transactions, reporting entities are required to disclose certain quantitative information in a tabular format, separately for assets and liabilities. The information required includes:

        • The gross amounts of those recognized assets and those recognized liabilities
        • The amounts offset in accordance with the guidance in ASC 210-20-45 and ASC 815-10-45 to determine the net amounts presented in the balance sheet
        • The net amounts presented in the balance sheet
        • The amounts subject to an enforceable master netting arrangement or similar agreement not netted on the balance sheet, including:
          • The amounts related to recognized financial instruments and other derivatives when management makes an accounting policy election not to offset, or the amounts do not meet some or all of the guidance in either ASC 210-20-45 or ASC 815-10-45
          • The amounts related to financial collateral (including cash collateral)
          • The net amount after deducting the amounts relating to the master netting arrangement from the amounts presented in the balance sheet

          All transactions (in all currencies) subject to agreements that legal counsel has determined qualify as master netting arrangements and that are in scope of the disclosure requirements should be included in the tabular offsetting disclosure. Specifically, they should be included in the column "Gross amounts not offset in the statement of financial position" (if they are not offset in the balance sheet).

          Figure FSP 19-2 contains an example of the tabular offsetting disclosure.

          Figure FSP
          19-2 Illustrative tabular disclosure of offsetting

          This figure is excerpted from ASC 210-20-55-20 and explained in the sections that follow.

          Gross amounts not offset in the statement of financial position
          D Description Gross amounts of recognized assets Gross amounts offset in the statement of financial position Net amounts of assets presented in the statement of financial position Financial instruments collateral Cash collateral received Net amount

          19.5.7.1 Disclosure of collateral

          The balances disclosed in column D may include both cash and financial instrument collateral. However, there are limits to the amounts reported in column D, such as for excess collateral. The guidance includes an example of a repurchase agreement that is accounted for as a collateralized lending whereby the carrying amount of the loan is $90 million and the fair value of the collateral received is $105 million. The example illustrates that the amount of collateral received included in the disclosure is limited to $90 million unless rights to collateral can be enforced across financial instruments. Given the exclusion of overcollateralization, collateral balances disclosed in column D in accordance with this guidance may not agree with other collateral disclosures, or may not provide financial statement users with a full appreciation of the nature of collateral received or posted. Reporting entities may wish to provide information on overcollateralization as a supplement to the required disclosures.

          Additionally, the balances disclosed in the financial instrument collateral disclosures may not be included on the balance sheet due to the related recognition guidance for the instrument. Although such collateral is not recognized in the financial statements, it will be captured by the disclosure requirements (as illustrated in Example 1 in ASC 210-20-55-20 and Example 2 in ASC 210-20-55-21).

          While not required, reporting entities may further disaggregate the collateral balances disclosed into additional categories, such as on-balance sheet collateral and off-balance sheet collateral. This supplemental disclosure may help financial statement users better understand how the amounts disclosed are reported in the financial statements.

          Reporting entities should consider the legal characterization of variation margin through consultation with their legal counsel. Whether it is collateral or a partial settlement payment determines whether the variation is presented and disclosed as part of the derivative or separately as collateral.

          19.5.7.2 Level of disaggregation

          The guidance allows flexibility with respect to how certain items are disclosed. Reporting entities can choose to disclose items in columns C through F either by type of financial instrument (e.g., derivatives or reverse repurchases) or by counterparty.

          ASC 210-20-55-22 provides an offsetting disclosure example for a sophisticated entity (one that engages in “significant derivative activity”). This example disaggregates derivatives by risk (e.g., interest rate, foreign exchange), as discussed in ASC 815-10-50-4D, and instrument type (e.g., swaps, options) and by clearing mechanism (i.e., exchange-traded versus exchange-cleared versus over-the-counter).

          There will be judgment involved in determining the level of disaggregation required. We believe the extent of a reporting entity’s derivative activity and its business purpose should be the drivers of this determination, in addition to materiality. For example, a non-financial services reporting entity may engage in material derivative activity for hedging purposes, but the types of derivatives it enters into or the associated clearing mechanism may be relatively narrow in scope (e.g., solely foreign exchange derivative contracts). In contrast, a financial institution that has extensive derivative operations and transacts in multiple types of derivatives using multiple types of clearing mechanisms should consider providing more disaggregated disclosures.

          For reporting entities that elect to disaggregate the disclosure by financial instrument type instead of by counterparty, collateral posted by or received from a given counterparty will need to be allocated to the respective financial instruments with that counterparty. While collateral may not be posted on an instrument-by-instrument basis (it may be posted in a pool across instrument types), we believe a reasonable allocation methodology should be utilized to allocate collateral received by instrument type for disclosure purposes. A similar approach may be taken to allocate the netting that is applied on the balance sheet by counterparty (i.e., column B in the disclosure).

          The allocation method adopted is a matter of judgment and a variety of methods may be appropriate. Whatever method is adopted, reporting entities should apply it consistently (i.e., in the balance sheet and the disclosure so they reconcile to each other) and consider disclosing the methodology used. Methods of allocation of credit risk in the determination of fair value are discussed in FV 8.2.4.1 and FV 8.2.4.2.

          The tabular disclosure of offsetting requires gross and net balances related to transactions that are subject to master netting arrangements, regardless of whether those balances are offset in the balance sheet. If a reporting entity has instruments that meet the scope of the disclosures, but that do not meet the offsetting guidance in ASC 210 or ASC 815, or that management does not elect to offset, the amounts required to be disclosed in column A would equal the amounts required in column C in Figure FSP 19-2.

          The amounts disclosed in column C in Figure FSP 19-2 should reconcile to the individual financial statement line item on the balance sheet. To facilitate this reconciliation, reporting entities may elect to include all derivatives, repurchase agreements, and securities lending transactions in the disclosure, regardless of whether the transactions are subject to an enforceable master netting arrangement or similar agreement. Typically, reporting entities separate contracts that are subject to master netting arrangements or similar agreements from ones that are not, but still include them in the disclosure, to facilitate reconciliation to the balance sheet. When a reporting entity elects to include contracts that are not subject to master netting agreements in the disclosures, it should disclose that contracts are included in the disclosure that are not subject to master netting arrangements.

          If a reporting entity only includes transactions subject to a master netting arrangement in its disclosure, and the balances in column C in Figure FSP 19-2 correlate to a financial statement line item that includes other balances (e.g., other assets or liabilities not subject to a master netting arrangement), the reporting entity should reconcile the disclosure to the total balance.