Hedge De-Designation

When your hedge transaction criteria are not met, including failed effectiveness assessment tests, you must de-designate the hedges, unwind their components, and apply mark-to-market accounting back to the last recorded date that the hedge passed effectiveness assessment. If a fundamental change in nature has occurred to the criteria you are hedging, FAS 133 accounting ends. For example, if you sell the recognized asset/liability, it expires, or the once firm commitment is terminated, FAS 133 accounting no longer holds.

Whenever deals meet documentation and effectiveness assessment testing requirements, you can use FAS 133's special accounting and benefit from decreased income statement volatility.

This flowchart provides an overview of FAS 133 hedge accounting.

FAS 133 Hedge Accounting overview

Ineligible and Eligible Hedge Scenarios

These types of hedge scenarios are ineligible under FAS 133:

  • Liquidity

  • Theft

  • Weather

  • Competition

  • Seasonality

  • Political

  • Operational

These types of hedge changes are eligible under FAS 133:

  • Fair value of entire financial instrument.

  • Percentage of entire fair value of the financial instrument.

  • Fair value attributable to changes in interest (including prepayment as a separate component of interest rate risk).

  • Fair value attributable to changes in foreign currency exchange rates.

  • Fair value attributable to changes in the obligator's creditworthiness.