Derivative & Hedging Liabilities

Category

Balance Sheet

Units

Currency

US-GAAP elements

DerivativeLiabilitiesDerivativeLiabilitiesCurrentDerivativeLiabilitiesNoncurrent

Reference

ASC 815, Derivatives and Hedging

Source

Reported in SEC EDGAR filings (US-GAAP XBRL taxonomy)

Derivative and hedging liabilities are the fair value of derivative contracts that are currently in a loss position for the company, meaning it would have to pay to exit them at the balance-sheet date. Typical examples are interest-rate swaps, foreign-currency forwards and options, and commodity futures used to hedge fuel, metals, or energy costs.

A derivative is a contract whose value depends on an underlying price or rate and that can be settled net, usually without exchanging the full notional amount. Whether it shows up as an asset or a liability depends on which side of the contract is winning on the reporting date, so the same contract can move between the two from one quarter to the next.

ASC 815 requires every derivative to be recognized on the balance sheet at fair value. Companies can designate some as hedges of specific exposures, such as fair-value hedges, cash-flow hedges, and net-investment hedges, and hedge accounting then controls when gains and losses reach earnings. Undesignated derivatives run their changes in fair value straight through the income statement. In XBRL filings the balance is tagged DerivativeLiabilities in total, or DerivativeLiabilitiesCurrent and DerivativeLiabilitiesNoncurrent when a company splits it by expected settlement date.

Reported amounts are usually after the effect of master netting arrangements, under which a company that holds offsetting contracts with the same counterparty may present them net. Companies must disclose the gross amounts and the effect of netting and collateral in a footnote. Because of this, two companies with similar hedging programs can show quite different balance-sheet figures depending on whether they elect to offset. Many companies do not show derivatives on their own line at all and fold them into other current or other noncurrent liabilities.

For most nonfinancial companies, derivative liabilities are hedges, and a loss on the derivative is usually offset by a gain on the item being hedged, such as lower fuel costs or cheaper foreign-currency purchases. Analysts look at the balance mainly to understand a company's risk-management program and its exposure to rates, currencies, and commodities. Large or rapidly growing balances that are not tied to a clear hedging purpose deserve a closer look at the derivatives footnote.