What are the journal entries for a cash flow hedge under US GAAP?

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AcadiFi · Accepted Answer

Cash flow hedges defer the effective portion of derivative gains/losses in OCI until the hedged transaction...

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At inception: no entry (futures have zero fair value). At each reporting date, if the futures fair value rises to $90,000, the entry is Dr. Derivative Asset 90,000 / Cr. OCI 90,000 (assuming 100% effectiveness). Any ineffective portion goes to P&L directly.

When Kestrel actually buys the fuel at spot $3.00/gallon, they record Dr. Fuel Inventory 1,500,000 / Cr. Cash 1,500,000. Simultaneously, they settle the futures: Dr. Cash 100,000 / Cr. Derivative Asset 100,000 (rolling the gain to cash).

When the fuel is consumed in operations, the deferred OCI gain is reclassified: Dr. Accumulated OCI 100,000 / Cr. Fuel Expense 100,000. This effectively lowers the effective fuel cost back to the locked-in $2.80/gallon equivalent.

If the forecasted transaction becomes probable of not occurring, accumulated OCI must be immediately reclassified to earnings. Candidates often miss the timing: OCI reclassification tracks the hedged item's earnings impact, not derivative settlement date.

What are the journal entries for a cash flow hedge under US GAAP?

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