What happens when a hedge relationship is discontinued?

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AcadiFi · Accepted Answer

Discontinuation of hedge accounting is common when (a) the derivative expires or is sold, (b) the hedge no longer meets qualifying criteria, (c) the forecasted transaction is no longer probable, or (d) management voluntarily de-designates. For Partridge's de-designated cash flow hedge of forecasted natural gas purchases: the derivative continues to be marked to market through P&L going forward (no longer receives OCI deferral). The accumulated OCI balance at de-designation is frozen and released to earnings as the originally hedged forecasted transactions affect earnings — if those transactions remain probable of occurring within two months of originally specified timing. If the forecasted transaction becomes probable of NOT occurring, the entire accumulated OCI balance is immediately reclassified to P&L. This is the painful scenario — a large deferred gain or loss hits earnings in one period. ```mermaid flowchart TD A[Discontinue
Hedge] --> B{Forecast
Still Probable?} B -->|Yes| C[Release OCI
As Planned] B -->|No| D[Immediate P&L
Reclass] A --> E[Derivative → P&L
Going Forward] ``` For fair value hedges, the previous basis adjustment to the hedged item remains and is amortized to earnings using effective interest method over the remaining life (for financial instruments). For net investment hedges, the CTA balance stays until sale of the foreign operation.

What happens when a hedge relationship is discontinued?

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