# Prop. Treas. Reg. § 1.56A-24: AFSI adjustments for hedging transactions and hedged items. Proposed regulation, not in force. REG-112129-23, 89 FR 75062, published 2024-09-13 . Interprets 26 U.S.C. § 56A. Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows: (a) Overview. This section provides rules under section 56A of the Code for determining AFSI for certain hedging transactions and hedged items. Paragraph (b) of this section provides definitions that apply for purposes of this section. Paragraph (c) of this section provides general rules that may apply to disregard a fair value measurement adjustment for purposes of determining AFSI of a CAMT entity for a taxable year. Paragraph (d) of this section provides a rule for determining AFSI if a CAMT entity marks to market a net investment hedge for regular tax purposes. Paragraph (e) of this section provides operative rules for the application of paragraphs (c) and (d) of this section. Paragraph (f) of this section provides examples illustrating the application of the rules in this section. Paragraph (g) of this section provides the applicability date of this section. (b) Definitions. For purposes of this section: (1) AFSI hedge —(i) In general. Except as provided in paragraph (b)(1)(ii) of this section, the term AFSI hedge means an asset or a liability of a CAMT entity for which there are fair value measurement adjustments and that— (A) Is entered into as a hedging transaction, as defined in § 1.1221-2(b) (whether or not the character of gain or loss from the transaction is determined under § 1.1221-2), a § 1.1275-6 hedge that is part of an integrated transaction subject to § 1.1275-6, a section 1256(e) hedging transaction, a section 988(d) hedging transaction that is part of a transaction that is integrated under § 1.988-5 or other regulations issued under section 988(d) of the Code (or an advance ruling described in § 1.988-5(e)) that govern the character or timing of gain or loss from the transaction, or a position that is a hedge under section 475(c)(2)(F) of the Code; (B) Is a hedge that qualifies for, and is properly treated by the CAMT entity as subject to, hedge accounting (for example, under Accounting Standards Codification paragraph 815-20-25-1 or IFRS 9 Chapter 6) and reported on a CAMT entity's AFS; or (C) Is described in both paragraphs (b)(1)(i)(A) and (B) of this section. (ii) Exception for certain insurance hedges. The term AFSI hedge does not include an asset or a liability that is entered into as a hedging transaction, as defined in § 1.1221-2(b) (whether or not the character of gain or loss from the transaction is determined under § 1.1221-2), by a covered insurance company, as defined in § 1.56A-22(b)(1), to manage risk of fluctuations in the value of one or more assets or indices that are taken into account in determining— (A) The obligations of the covered insurance company to holders of life insurance or annuity contracts; or (B) The obligations of the covered insurance company to another covered insurance company with respect to obligations to holders of life insurance or annuity contracts. (2) AFSI subsequent adjustment date —(i) In general. Except as provided in paragraph (b)(2)(ii) of this section, the term AFSI subsequent adjustment date means the earliest day on which any of the following events occur— (A) An AFSI hedge or a hedged item (as applicable) subject to paragraph (c)(2) of this section matures or is sold, disposed of, or otherwise terminated; (B) An AFSI hedge or a hedged item (as applicable) that corresponds to the hedged item or the AFSI hedge subject to paragraph (c)(2) of this section matures or is sold, disposed of, or otherwise terminated; or (C) An asset or liability ceases to constitute an AFSI hedge or hedged item (as applicable) subject to paragraph (c)(2) of this section. (ii) Certain corporate and partnership transactions —(A) Covered nonrecognition transactions. The acquisition of an AFSI hedge and the corresponding hedged item subject to paragraph (c)(2) of this section by a CAMT entity in a covered nonrecognition transaction (as defined in § 1.56A-18(b)(9)) is not an AFSI subsequent adjustment date. As a result, this section continues to apply to the AFSI hedge and hedged item that were acquired by the CAMT entity. The acquisition of an AFSI hedge or hedged item subject to paragraph (c)(2) of this section without the corresponding hedged item or AFSI hedge (as applicable) by a CAMT entity in a covered nonrecognition transaction (as defined in § 1.56A-18(b)(9)) is an AFSI subsequent adjustment date. (B) Covered recognition transactions and certain partnership transactions. The acquisition of an AFSI hedge or hedged item (as applicable) subject to paragraph (c)(2) of this section with or without the corresponding hedged item or AFSI hedge (as applicable) by a CAMT entity in a covered recognition transaction (as defined in § 1.56A-18(b)(10)), a contribution of an AFSI hedge or hedged item (as applicable) subject to paragraph (c)(2) of this section with or without the corresponding hedged item or AFSI hedge (as applicable) to a partnership in a transaction to which section 721(a) applies, or a distribution of an AFSI hedge or hedged item (as applicable) subject to paragraph (c)(2) of this section with or without the corresponding hedged item or AFSI hedge (as applicable) from a partnership to a partner in a transaction to which section 731(b) applies is an AFSI subsequent adjustment date. (3) Fair value measurement adjustment. The term fair value measurement adjustment means a change in the value of an asset or a liability due to required periodic determinations at least annually of the increases or decreases in fair value of that asset or liability included in a CAMT entity's FSI, regardless of whether the determinations are required due to the type of asset or liability or due to an election by the CAMT entity. The term fair value measurement adjustment does not include an impairment loss or impairment loss reversal. (4) Hedged item. The term hedged item means an asset or a liability that is reported on a CAMT entity's AFS and for which there are one or more AFSI hedges managing a risk of interest rate or price changes, a risk of currency fluctuations, or another risk that is eligible to be managed by an AFSI hedge. (5) Net investment hedge. The term net investment hedge means an asset or a liability entered into by a CAMT entity to manage the foreign currency exposure of a net investment in a foreign operation (including under Accounting Standards Codification paragraph 815-20-25-66 or IFRS 9 Chapter 6.5.13) for which there are changes in the value of the asset or liability due to required periodic determinations (at least annually) of the increases or decreases in fair value of that asset or liability that are included in the CAMT entity's equity accounts on the CAMT entity's AFS, such as retained earnings or OCI. (c) Fair value measurement adjustments for an AFSI hedge or a hedged item— (1) Scope. For purposes of determining AFSI of a CAMT entity for a taxable year, paragraph (c)(2) of this section applies to a fair value measurement adjustment for an AFSI hedge or a hedged item if the fair value measurement adjustment would otherwise be included in the CAMT entity's AFSI (determined without regard to this section but after giving effect to all other sections in the section 56A regulations except for § 1.56A-23). Paragraph (c)(2) of this section provides the exclusive rules for the treatment of such a fair value measurement adjustment for purposes of determining AFSI. (2) Treatment of fair value measurement adjustment for certain AFSI hedges or hedged items. A fair value measurement adjustment for an AFSI hedge or a hedged item for a taxable year is disregarded by a CAMT entity for purposes of determining the CAMT entity's AFSI if the CAMT entity either— (i) Has a fair value measurement adjustment described in paragraph (c)(1) of this section with respect to an AFSI hedge but not the hedged item, and marks to market neither the AFSI hedge nor the hedged item for regular tax purposes; or (ii) Has a fair value measurement adjustment described in paragraph (c)(1) of this section with respect to a hedged item but not the AFSI hedge, and marks to market neither the hedged item nor the AFSI hedge for regular tax purposes. (3) Application to prior taxable years. Adjustments to AFSI under paragraph (c)(2) of this section are required to be made for all taxable years prior to the taxable year in which the AFSI hedge or hedged item matures or is sold, disposed of, or otherwise terminated, including taxable years that end on or before December 31, 2019. (d) Net investment hedge adjustments. To the extent a CAMT entity marks to market a net investment hedge for regular tax purposes for a taxable year, the CAMT entity includes in AFSI for the taxable year the gain or loss resulting from marking to market the net investment hedge for regular tax purposes. (e) Operative rules —(1) Inclusion of certain taxable amounts in AFSI. If a fair value measurement adjustment that is disregarded under paragraph (c)(2) of this section in a taxable year includes amounts corresponding to items of income, gain, deduction, or loss under chapter 1 in that taxable year, the CAMT entity includes such amounts in AFSI in that taxable year. See paragraph (f)(5) of this section (Example 5). (2) Subsequent adjustments for AFSI hedges and hedged items. Paragraphs (e)(2)(i) and (ii) of this section apply in the taxable year in which there is an AFSI subsequent adjustment date. (i) In the taxable year of an AFSI subsequent adjustment date, the CAMT entity includes in AFSI the cumulative fair value measurement adjustments previously disregarded in determining AFSI under paragraph (c)(2) of this section, net of any amounts included in AFSI under paragraph (e)(1) of this section. In the case of multiple AFSI hedges with respect to a single hedged item, the preceding sentence applies only to the AFSI hedge for which there was an AFSI subsequent adjustment date. (ii) Following an event described in paragraph (b)(2)(i)(B) or (C) of this section, the CAMT entity uses the AFS basis of the AFSI hedge or hedged item that was subject to paragraph (c)(2) of this section immediately following the AFSI subsequent adjustment date as the CAMT basis in order to determine any further recognized gain or loss included in AFSI with respect to the AFSI hedge or hedged item. (3) Subsequent adjustments for net investment hedges. In the taxable year in which the net investment hedge subject to paragraph (d) of this section matures or is sold, disposed of, or otherwise terminated, or in which the asset or liability that was a net investment hedge subject to paragraph (d) of this section ceases to constitute a net investment hedge, the CAMT entity adjusts the amount included in AFSI by the cumulative mark-to-market gain or loss for regular tax purposes included in AFSI under paragraph (d) of this section. If the asset or liability that was a net investment hedge subject to paragraph (d) of this section ceases to constitute a net investment hedge but does not mature or is not sold, disposed of, or otherwise terminated, as of the date it ceases to constitute a net investment hedge, the CAMT entity redetermines the CAMT basis of the net investment hedge that was subject to paragraph (d) of this section in accordance with § 1.56A-1(d)(4). For purposes of the preceding sentence, the CAMT basis of the net investment hedge is the initial AFS basis of the net investment hedge (that is, the AFS basis as of the date the CAMT entity enters into the net investment hedge), adjusted to take into account the cumulative mark-to-market gain or loss for regular tax purposes included in AFSI under paragraph (d) of this section (and disregarding for this purpose any changes in AFS basis resulting from items with respect to the net investment hedge not included in AFSI). (f) Examples. The following examples illustrate the application of the rules in this section. For purposes of these examples, X is a corporation and, except as otherwise provided, the AFSI hedge and hedged item do not mature and are not sold, disposed of, or otherwise terminated during the taxable years involved, and the gain and loss occur in the same taxable year. (1) Example 1: Fair value measurement adjustment for an AFSI hedge— (i) Facts. X has an outstanding forward contract constituting an AFSI hedge with respect to a commodity delivery obligation constituting a hedged item. X has a fair value measurement adjustment described in paragraph (c)(1) of this section on the AFSI hedge of $20x of gain. There is no fair value measurement adjustment described in paragraph (c)(1) of this section on the hedged item. X does not mark to market the AFSI hedge or the hedged item for regular tax purposes. (ii) Analysis. For purposes of determining AFSI of X, X will disregard the fair value measurement adjustment of $20x of gain under paragraph (c)(2)(i) of this section because the forward contract is an AFSI hedge, there is no fair value measurement adjustment described in paragraph (c)(1) of this section on the hedged item, and X does not mark to market the AFSI hedge or the hedged item for regular tax purposes. (2) Example 2: AFSI hedge marked to market for regular tax purposes —(i) Facts. X has an outstanding futures contract constituting an AFSI hedge with respect to a purchased debt instrument constituting a hedged item. X has a fair value measurement adjustment described in paragraph (c)(1) of this section on the AFSI hedge of $15x of gain. There is no fair value measurement adjustment described in paragraph (c)(1) of this section on the hedged item. For regular tax purposes, the AFSI hedge is marked to market, resulting in X including $15x of gain on the AFSI hedge in X's taxable income. (ii) Analysis. For purposes of determining AFSI of X, X will not disregard the fair value measurement adjustment on the AFSI hedge of $15x of gain because the AFSI hedge is marked to market for regular tax purposes, and therefore paragraph (c)(2)(i) of this section does not apply. (3) Example 3: Fair value measurement adjustment for AFSI hedge and hedged item —(i) Facts. X has an outstanding futures contract constituting an AFSI hedge with respect to a fixed-rate obligation constituting a hedged item. X has a fair value measurement adjustment described in paragraph (c)(1) of this section on the AFSI hedge of $10x of gain, and a fair value measurement adjustment described in paragraph (c)(1) of this section on the hedged item of $10x of loss. For regular tax purposes, neither the AFSI hedge nor the hedged item is marked to market. (ii) Analysis. For purposes of determining the AFSI of X, X will not disregard either the fair value measurement adjustment of $10x of gain or the fair value measurement adjustment of $10x of loss because there are fair value measurement adjustments described in paragraph (c)(1) of this section for both the AFSI hedge and the hedged item, and therefore paragraphs (c)(2)(i) and (ii) of this section do not apply. (4) Example 4: Net investment hedge marked to market— (i) Facts. X has an outstanding futures contract constituting a net investment hedge. For regular tax purposes, the futures contract is marked to market, resulting in X including $10x of unrealized loss on the net investment hedge in X's taxable income. X includes $8x of unrealized loss on the net investment hedge in OCI. (ii) Analysis. Because the futures contract is a net investment hedge, X will include the mark-to-market loss of $10x for regular tax purposes on the futures contract in AFSI under paragraph (d) of this section, rather than the $8x of unrealized loss included in OCI. (5) Example 5: Inclusion of original issue discount (OID) in AFSI— (i) Facts. X holds a debt instrument with OID subject to section 1272 of the Code that is a hedged item and that has a fair value measurement adjustment described in paragraph (c)(1) of this section. X also holds an AFSI hedge that does not have a fair value measurement adjustment described in paragraph (c)(1) of this section. The fair value measurement adjustment includes amounts corresponding to the OID on the debt instrument. For regular tax purposes, neither the AFSI hedge nor the hedged item is marked to market. The fair value measurement adjustment is disregarded under paragraph (c)(2)(ii) of this section. (ii) Analysis. Under paragraph (c)(2)(ii) of this section, X disregards the fair value measurement adjustment on the debt instrument in determining AFSI. Instead, X will include the taxable income from the OID on the debt instrument in determining AFSI under paragraph (e)(1) of this section. (6) Example 6: Subsequent adjustments for AFSI hedge —(i) Facts. X has an AFSI hedge with an initial AFS basis of $100x. There are fair value measurement adjustments described in paragraph (c)(1) of this section for the AFSI hedge of $10x of gain in 2024 and $2x of loss in 2025 that were disregarded under paragraph (c)(2) of this section. There is no fair value measurement adjustment for the hedged item, and X does not mark to market the AFSI hedge or the hedged item for regular tax purposes. This gain and loss results in an increase in the AFS basis to $110x in 2024 and a decrease in the AFS basis to $108x in 2025. In 2026, the AFSI hedge is sold for $115x when the AFS basis is still $108x, giving rise to an FSI gain of $7x. (ii) Analysis. Under paragraph (e)(2)(i) of this section, X includes in AFSI the cumulative fair value measurement adjustments of $8x previously disregarded in determining AFSI under paragraph (c)(2) of this section. X also includes in AFSI the FSI gain of $7x from the taxable year that includes the AFSI subsequent adjustment date to take into account the net difference between the $115x received in the sale and the AFS basis as of the AFSI subsequent adjustment date of $108x. As a result, the sale of the AFSI hedge gives rise to $15x of gain in 2026 for purposes of determining AFSI for that taxable year. (7) Example 7: Subsequent adjustments for AFSI hedge with negative carrying value— (i) Facts. In 2024, X enters into a forward contract constituting an AFSI hedge with respect to a purchase obligation constituting a hedged item. The forward contract has a three-year term and an initial carrying value (AFS basis) of $0. At the end of 2024, there is a fair value measurement adjustment described in paragraph (c)(1) of this section for the forward contract of $15x of loss that is included in X's FSI for that year and was disregarded under paragraph (c)(2) of this section. There is no fair value measurement adjustment for the purchase obligation, and X does not mark to market the forward contract or the purchase obligation for regular tax purposes. Applicable financial accounting principles treat the forward contract as a liability with a negative carrying value (AFS basis) at the end of 2024 of $15x. In 2025 and at a time when the forward contract still has a negative carrying value (AFS basis) of $15x, the purchase obligation is sold, which sale gives rise to an AFSI subsequent adjustment date. Because the forward contract has not yet matured or been sold, disposed of, or otherwise terminated, there is no gain or loss included in X's FSI as of the AFSI subsequent adjustment date. (ii) Analysis. Under paragraph (e)(2)(i) of this section, X includes in AFSI in 2025 the $15x of loss to take into account the fair value measurement adjustment for the forward contract that was previously disregarded under paragraph (c)(2) of this section. Under paragraph (e)(2)(ii) of this section, for purposes of determining any future gain or loss included in the AFS basis (and the CAMT basis) of the forward contract immediately following the AFSI subsequent adjustment date is −$15x. (g) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER ].