Derivatives In Financial Statements

A new decree in Italy enables more openness from legislators to recognise derivative instruments in the financial statements of ITA Gaap entities. These had previously been omitted due to concerns they would impact companies' assets in periods of instability.

The recognition of derivative instruments took on fundamental importance with the approval of Legislative Decree no. 139/2015; while in the financial statements for previous years they were only disclosed in the notes, the new rules require them also to be recognised in the financial statements of ITA GAAP entities, that are measured at fair value, along with the hedging relationship. Such instruments are now accepted as instruments for hedging risk. The following items have been added to accommodate values relating to financial instruments.

Balance sheet

Assets III. Long-term investments 4) Derivative instrument assets Liabilities and Owner's Equity A) Shareholders' equity VII - Reserve for transactions to hedge expected cash flows B) Provisions for liabilities and charges 3) Derivative instrument liabilities Income statement

D) Adjustments to financial assets and liabilities 18) Revaluations d) of derivative instruments 19) Write-downs d) of derivative instruments

Recognition of a derivative to hedge the risk of cash flow variability must comply with a set of characteristics established by OIC 32 and must be demonstrated in the hedging relationship: in the preliminary valuation, it is crucial to determine whether the fair value assumed by a derivative is intended to hedge a cash flow risk (i.e. a risk deriving from changes in the value of cash flows). This valuation determines whether such changes in fair value will affect the income statement and therefore also tax, or not during the hedging. Recording of the fair value hedge

The principle is established in Art. 2426 of the Italian Civil Code: changes in the fair value to hedge cash flow risk are recognised in the dedicated equity reserve, with the recognition of both positive and negative values as a contra-entry to the provision for risk for derivatives. If there is no hedging relationship, any changes in fair value will affect the income statement as they do not have a closely-correlated hedging relationship or because the derivative has been acquired for speculative purposes.

Usually, the risk of interest rate fluctuations is hedged by an interest rate swap, where a company that has taken out a variable-rate loan intends to...