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Accounting Treatment

Accounting
   Cash Flow
   Fair Value
   Foreign Operations
   Speculative Trades

The accounting treatment that applies to any given derivatives position may vary, depending on whether the derivative is used as a hedging instrument, or not. Even assuming the derivative is intended as a hedge, applying special hedge accounting cannot simply be elected. The exposure being hedged must qualify as an permissible hedge item, and the intended hedging relationship much be documented as such at the inception of the hedge.

With the determination that the derivative is to be used as a hedge and with all the necessary prerequisites satisfied, the appropriate accounting treatments would depend on the nature of the hedge. Three different types of hedge treatments are (a) cash flow hedges, (b) fair value hedges, and (c) hedges of net investments in foreign operations.

Derivatives that are not intended to serve as hedges – or derivatives that fail to qualify for hedge accounting treatment – must be accorded the "regular" accounting treatment, which is generally referred to as accounting for speculative derivative transactions.

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