A company enters into a derivative to hedge the exposure to changes in the fair value of a recognized asset (Fair Value Hedge). In Year 1, the derivative gains $10,000 in value, and the hedged asset loses $8,000 in value due to the hedged risk. How is this reported?

Answer options:

Derivative Gain in OCI; Asset Loss in NI.

Derivative Gain in NI; Asset Loss in NI.

Derivative Gain in OCI; Asset Loss in OCI.

Net Gain of $2,000 in OCI.

How to approach this question

Identify Hedge Type. Fair Value Hedge -> Net Income (match gain/loss). Cash Flow Hedge -> Effective portion to OCI.

Full Answer

B.Derivative Gain in NI; Asset Loss in NI.✓ Correct

In a Fair Value Hedge, gains/losses on the derivative and the offsetting loss/gain on the hedged item are recognized in earnings (Net Income) in the same period.

Common mistakes

Confusing FV Hedge with Cash Flow Hedge (OCI).

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