Many airlines hedge their purchases of jet fuel through various means. Some use OTC jet fuel contracts, others use OTC or exchange-traded heating oil contracts, others use OTC or ET crude oil contracts and most use a combination of all three. All of this is perfectly fine. Since the majority of airlines don’t want the unrealized gain/loss fluctuations on these contracts to be taken through the income statement each reporting period, many of them designate these contracts under hedge accounting rules under ASC 815 (FAS 133).
Many of these derivative contracts are not exactly the “perfect” (different locations, different grades, transportation surcharges, profit adders, etc.) hedges for the underlying physical purchases of jet fuel; therefore, airlines are commonly forced to apply the “long haul” method of hedge accounting on these strategies. Since the rules for long-haul are fairly complex and this strategy in particular fails fairly commonly under the “easy” method of hedge effectiveness assessment (dollar offset, anyone?) many airlines properly try to use regression on this strategy.
So why are some airlines headed for restatement even when they are trying to use a robust method of assessment?
The “shortcut” (pun intended) many airlines try and take with assessment (most commonly regression analysis) is that they try and regress the changes in spot values of the value of the exposure (or hypothetical derivative) and the value of the derivative. This is perfectly allowable. However, what is not allowable under paragraph 63 is measuring ineffectiveness using the full fair value of both the exposure (hypothetical derivatives) as well as the derivative. Using one method “excluding time value” for assessment and another for measurement “including time value” is expressly prohibited under ASC 815-20-25.