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I thought that a cash flow hedge WOULD EVENTUALLY impact the income statement at the time of settlement. Essentially, the value of the hedge is carried on the balance sheet until settlement. At the point of settlement, if the hedge was not 100% effective, then the gain (loss) is reported as other income.

Is this understanding incorrect?



Cash flow hedges, realized or unrealized, only exist in other comprehensive income and the balance sheet, they don't make it to the P&L on the income statement. The only part/percentage of a cash flow hedge that's recognized in the P&L would be the part (if any) that was deemed ineffective.


With regard to a fair value hedge. All gains (losses) for the quarter are reported as revenue (lost revenue) on the income sheet, whether realized or not. In this case there clearly will be non-cash gains(losses).

Correct?



Well, if they're 100% effective, the gain/loss in the fair value hedge will be perfectly netted out by the loss/gain of the underlying asset, resulting in no net difference in the P&L.

Mike
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