ASC 815 requires companies to recognize all derivative instruments in the consolidated balance sheet as either assets or liabilities at fair value. The accounting for changes in fair value of a derivative is dependent upon whether or not the derivative has been designated and qualifies for hedge accounting treatment and the type of hedging relationship. For derivatives designated and qualifying as hedging instruments, the company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

Cash Flow Hedging Strategy

The company uses derivative instruments in an attempt to manage its exposure to transactional foreign currency exchange risk and interest rate risk. Foreign forward exchange contracts are used to manage the price risk associated with forecasted sales denominated in foreign currencies and the price risk associated with forecasted purchases of inventory over the next twelve months.

The company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet measured at fair value. A majority of the company’s derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the fair value of the hedged item, if any, is recognized in current earnings during the period of change.

To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory purchases/sales over the next year, the company utilizes foreign currency forward contracts to hedge portions of its forecasted purchases/sales denominated in foreign currencies. The gains and losses are included in cost of products sold and selling, general and administrative expenses on the consolidated statement of comprehensive income (loss). If it is later determined that a hedged forecasted transaction is unlikely to occur, any prospective gains or losses on the forward contracts would be recognized in earnings. The company does not expect any material amount of hedge ineffectiveness related to forward contract cash flow hedges during the next twelve months.

The company has historically not recognized any material amount of ineffectiveness related to forward contract cash flow hedges because the company generally limits its hedges to between 50% and 90% of total forecasted transactions for a given entity’s exposure to currency rate changes and the transactions hedged are recurring in nature. Furthermore, the majority of the hedged transactions are related to intercompany sales and purchases for which settlement occurs on a specific day each month. Forward contracts with a total notional amount in USD of $171,770,000 and $228,640,000 matured during the twelve months ended December 31, 2017 and 2016, respectively.

Foreign exchange forward contracts qualifying and designated for hedge accounting treatment were as follows (in thousands USD):



	December 31, 2017					December 31, 2016
	Notional Amount		Unrealized Net Gain (Loss)			Notional Amount		Unrealized Net Gain (Loss)
USD / AUD	$	3,960	$	44		$	5,841	$	316
USD / CAD	33,344		115			2,604		(18		)
USD / CHF	—		—			370		15
USD / CNY	4,027		61			11,252		(301		)
USD / EUR	72,259		(558		)	60,387		1,826
USD / GBP	4,640		(124		)	3,253		(75		)
USD / NZD	9,300		11			9,650		(64		)
USD / SEK	—		—			4,923		146
USD / MXP	6,461		(158		)	6,148		(417		)
EUR / AUD	—		—			506		6
EUR / GBP	32,248		(682		)	14,511		(686		)
EUR / NOK	4,521		68			2,503		(25		)
EUR / SEK	7,732		39			—		—
EUR / NZD	2,855		(8		)	3,777		16
GBP / AUD	—		—			503		34
GBP / CHF	—		—			215		(10		)
GBP / SEK	—		—			1,389		(42		)
CHF / DKK	—		—			595		(2		)
DKK / SEK	6,453		(120		)	31,978		49
NOK / CHF	—		—			1,335		(13		)
NOK / SEK	—		—			2,618		21
	$	187,800	$	(1,312	)	$	164,358	$	776

Derivatives Not Qualifying or Designated for Hedge Accounting Treatment

The company utilizes foreign currency forward contracts that are not designated as hedges in accordance with ASC 815. These contracts are entered into to eliminate the risk associated with the settlement of short-term intercompany trading receivables and payables between Invacare Corporation and its foreign subsidiaries. The currency forward contracts are entered into at the same time as the intercompany receivables or payables are created so that upon settlement, the gain/loss on the settlement is offset by the gain/loss on the foreign currency forward contract. No material net gain or loss was realized by the company in 2017 or 2016 related to these contracts and the associated short-term intercompany trading receivables and payables.

Foreign exchange forward contracts not qualifying or designated for hedge accounting treatment entered into in 2017 and 2016, respectively, and outstanding were as follows (in thousands USD):



	December 31, 2017					December 31, 2016
	Notional Amount		Gain (Loss)			Notional Amount		Gain (Loss)
AUD / USD	$	2,750	$	(77	)	$	5,800	$	204
CNY / USD	—		—			5,556		(24		)
NZD / USD	3,300		(53		)	—		—
EUR / AUD	4,000		43			—		—
NZD / AUD	3,600		9			3,264		15
	$	13,650	$	(78	)	$	14,620	$	195

The fair values of the company’s derivative instruments were as follows (in thousands):



	December 31, 2017				December 31, 2016
	Assets		Liabilities		Assets		Liabilities
Derivatives designated as hedging instruments under ASC 815
Foreign currency forward exchange contracts	$	678	$	1,990	$	2,535	$	1,759
Derivatives not designated as hedging instruments under ASC 815
Foreign currency forward exchange contracts	52		130		219		24
	$	730	$	2,120	$	2,754	$	1,783

The fair values of the company’s foreign currency forward assets and liabilities are included in Other Current Assets and Accrued Expenses, respectively in the Consolidated Balance Sheets.

The effect of derivative instruments on the Statement of Operations and Other Comprehensive Income (OCI) was as follows, net of tax (in thousands):



Derivatives (foreign currency forward exchange contracts) in ASC 815 cash flow hedge relationships	Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)			Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Year ended December 31, 2017	$	(2,737	)	$	(755	)	$	(94	)
Year ended December 31, 2016	$	989		$	2,252		$	40

Derivatives (foreign currency forward exchange contracts) not designated as hedging instruments under ASC 815	Amount of Gain (Loss) Recognized in Income on Derivatives
Year ended December 31, 2017	$	(78	)
Year ended December 31, 2016	$	195

The gains or losses recognized as the result of the settlement of cash flow hedge foreign currency forward contracts are recognized in net sales for hedges of inventory sales or cost of product sold for hedges of inventory purchases. In 2017, net sales were increased by $517,000 and cost of product sold was increased by $1,357,000 for a net realized loss of $840,000. In 2016, net sales were increased by $4,453,000 and cost of product sold was increased by $1,880,000 for a net realized gain of $2,573,000. In 2015, net sales were decreased by $2,778,000 and cost of product sold was decreased by $3,890,000 for a net realized gain of $1,112,000.

A loss of $78,000 in 2017, a gain of $195,000 in 2016 and a loss of $54,000 in 2015 were recognized in selling, general and administrative (SG&A) expenses related to forward contracts not designated as hedging instruments that were entered into to offset gains/losses that were also recorded in SG&A expenses on intercompany trade receivables or payables. The gains/losses on the non-designated hedging instruments were substantially offset by gains/losses on intercompany trade payables.

The company's derivative agreements provide the counterparties with a right of set off in the event of a default that would enable the counterparty to offset any net payment due by the counterparty to the company under the applicable agreement by any amount due by the company to the counterparty under any other agreement. For example, the terms of the agreement would permit a counterparty to a derivative contract that is also a lender under the company's Credit Agreement to reduce any derivative settlement amounts owed to the company under the derivative contract by any amounts owed to the counterparty by the company under the Credit Agreement. In addition, the agreements contain cross-default provisions that could trigger a default by the company under the agreement in the event of a default by the company under another agreement with the same counterparty. The company does not present any derivatives on a net basis in its financial statements, other than the conversion and bond hedge derivatives which are presented net on the Consolidated Statement of Comprehensive Income (Loss), and all derivative balances presented are subject to provisions that are similar to master netting agreements.

During the first quarter of 2016, the company entered into privately negotiated convertible note hedges and related warrants in connection with its sale of $150,000,000 in aggregate principal amount of the company’s 5.00% Convertible Senior Notes due 2021. The 2021 warrants, which increased paid in capital by $12,376,000, are clearly and closely related to the convertible notes and thus classified as equity. The convertible note hedge asset and convertible debt conversion liability were recorded, based on initial fair values, as an asset of $27,975,000 and a liability of $34,480,000, respectively, and these fair values are updated quarterly with the offset to the income statement. See "Long-Term Debt" in the notes to the Consolidated Financial Statements included elsewhere in this report for more detail.

During the second quarter of 2017, the company entered into privately negotiated convertible 2022 note hedges and warrants in connection with its sale of $120,000,000 in aggregate principal amount of the company’s 4.50% Convertible Senior Notes due 2022. The 2022 warrants, which increased paid in capital by $14,100,000, are clearly and closely related to the convertible 2022 notes and thus classified as equity. The 2022 note hedge assets and 2022 convertible debt conversion liability were recorded, based on initial fair values, as an asset of $24,780,000 and a liability of $28,859,000, respectively, and these fair values are updated quarterly with the offset to the income statement. See "Long-Term Debt" in the notes to the Consolidated Financial Statements included elsewhere in this report for more detail.

The fair values of the outstanding convertible note derivatives as of December 31, 2017 and their effect on the Statement of Comprehensive Income (Loss) were as follows (in thousands):



				Gain (Loss)
	Fair Value			Twelve Months Ended
	December 31, 2017			December 31, 2017			December 31, 2016
Convertible 2021 debt conversion long-term liability	$	(53,154	)	$	(22,446	)	$	3,772
Convertible 2022 debt conversion long-term liability	(53,414		)	(24,555		)	—
Convertible 2021 note hedge long-term asset	46,915			21,444			(2,504		)
Convertible 2022 note hedge long-term asset	46,680			21,900			—
Net fair value and net gains (losses) on convertible debt derivatives	$	(12,973	)	$	(3,657	)	$	1,268

The 2021 and 2022 convertible debt conversion liability amounts and the 2021 and 2022 note hedge asset amounts are included in Other Long-Term Obligations and Other Long-Term Assets, respectively, in the company's Consolidated Balance Sheets.