A type of hedge defined by FAS 133. An entity may designate a derivative instrument as hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. That exposure may be associated with a recognized asset or liability such as all or some of the future interest payments due for a variable-rate debt. Alternatively, that exposure may be associated with a forecasted transaction such as a planned purchase or sale. Certain requirements must be met to qualify for cash flow hedge accounting. Gains or losses from the effective portion of a derivative used for a qualifying cash flow hedge are reported in comprehensive income. In other words, the gains and losses are used to adjust equity but are not included in income or losses from operations. Gains or losses from the ineffective portion of hedges must be reflected in earnings.
See comprehensive income, FAS 133, and hedge effectiveness. American Banker Glossary
Financial and business terms. 2012.