The item being hedged
must be identified no more than 35 days after the hedging transaction; see Regs.
Gains and losses on derivative instruments are either offset against corresponding gains or losses of the hedged
item through earnings in a fair value hedge, or accounted for in other comprehensive income for a cash flow hedge.
In light of this ruling, it may be advisable for taxpayers to review their treatment of interest-rate swaps and determine if they have been under-or overreporting gain or loss from terminated hedged
When the entity designates a derivative as a fair value hedge, generally accepted accounting principles require that the entity adjust the carrying amount of the hedged
item for the change in the hedged
item's fair value that is attributable to the hedged
He said such volatility is mitigated by the amendment provisions permitting the recognized items to be designated as hedged
In the absence of any statement including such receivables as "ordinary property" capable of being hedged
, needless confusion and controversy may arise.
The Tax Court also rejected the IRS's argument that, for a hedge to receive ordinary treatment, it must involve the same property as that being hedged
Mark-to-market: Take hedging gains or losses on a mark-to-market basis, instead of being treated as an element of cost or sales proceeds (even if inventory being hedged
is not marked to market).
Market-value changes caused by exchange-rate fluctuations should be included in your determination of current-period income and should offset the economic effects of changes in the exchange rates on the hedged
asset or liability.
Thus, eligible hedged
items are limited to property within the exceptions to tax code section 1221 (such as inventory and accounts receivable) as well as specialized properties (such as debt securities held by a bank) that are capital assets but, nevertheless, produce an ordinary gain or loss on sale.
In fact, the term 'hedge fund' is a bit of a misnomer because investors may be led to believe that strategies are hedged
to mitigate risk.
SFAS 80 prescribes a correlation test between the hedged
item and the hedging instrument that requires a company to examine historical relationships and to monitor the correlation after it executes the hedging transaction.