 |
 |
For purposes of illustrating how accounting results can vary, suppose now that the firm utilizes derivatives in addition to debt to hedge itself. The company expects it will get hedge accounting treatment on its derivatives. Its reporting position is now represented by the following chart.
($millions)
Position |
Fair Value |
AOCI |
Retained Earnings |
Loans |
$3.0 |
- |
- |
Debt |
-$2.0 |
- |
- |
Derivatives |
-$1.0 |
-$1.0 |
- |
Net |
0 |
-$1.0 |
- |
Although the firm is hedged, it looks like it is taking risk due to the fluctuation in AOCI. To better manage the risk of adverse changes in reported AOCI, the firm could designate some of its assets as Available for Sale (AFS). AFS assets are recorded at Fair Value, and changes in the Fair Value are reflected in AOCI.
With this change, the firm’s position is reflected as follows:
Position |
Fair Value |
AOCI |
Retained Earnings |
Loans--HTM |
$2.0 |
- |
- |
Loans--AFS |
$1.0 |
$1.0 |
|
Debt |
-$2.0 |
- |
- |
Derivatives |
-$1.0 |
-$1.0 |
- |
Net |
0 |
0 |
- |
