Hedge effectiveness evidence supports the expectation that the hedging instrument offsets changes in the hedged item or transaction attributable to the designated risk. It is tied to the documented relationship, method, dates, and risk.
Preserve inception and ongoing work
The file distinguishes the prospective assessment at inception from each later assessment. It records critical terms, market data, probability support for a forecast transaction, the quantitative or qualitative method, test frequency, method consistency, and counterparty facts. ASC 815-20-25-1 introduces the criteria for designated hedging instruments and hedged items or transactions.
A copper derivative and purchase forecast may have close price offset during one quarter. That result is useful evidence, but hindsight alone does not prove qualification. A change in volume, grade, location, timing, notional amount, counterparty, or assessment method can alter the conclusion.
Connect failures to action
Set review triggers and identify the affected accounting period. If evidence no longer supports the relationship, determine the required discontinuation analysis under current guidance. Keep derivative recognition visible while the hedge overlay is open. The effectiveness file supports the method and conclusion; it does not replace the designation, valuation, or forecast-probability evidence.
Put the concept to work
Analyze this concept
- Analyze a supplied file for hedge effectiveness evidence, show the evidence and mechanics, and identify any conclusion that remains outside the supplied scope.
Learning resources
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