ASC 815 requires companies to recognize all derivative instruments in the condensed consolidated balance sheets 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. 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 condensed consolidated balance sheets measured at fair value. All 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 condensed consolidated statements 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, most 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 $67,853,000 and $90,800,000 matured during the nine months ended September 30, 2022 and September 30, 2021, respectively, compared to $29,189,000 and $32,685,000 during the three month ended September 30, 2022 and September 30, 2021, respectively.

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


	September 30, 2022				December 31, 2021
	Notional Amount		Unrealized Net Gain (Loss)		Notional Amount		Unrealized Net Gain (Loss)

USD / EUR	3,492		441		—		—
USD / CAD	4,523		(343)		—		—


EUR / GBP	5,961		179		—		—



EUR / NOK	689		(5)		—		—




NOK / SEK	1,089		(43)		—		—
















USD / MXN	1,089		70		23		1





	$	16,843	$	299	$	23	$	1

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 2022 or 2021 related to these contracts and the associated short-term intercompany trading receivables and payables.

Foreign currency forward exchange contracts not qualifying or designated for hedge accounting treatment, as well as ineffective hedges, entered into in 2022 and 2021, respectively, and outstanding were as follows (in thousands USD):


	September 30, 2022				December 31, 2021
	Notional Amount		Gain (Loss)		Notional Amount		Gain (Loss)
USD / AUD	$	1,194	$	104	$	3,792	$	(57)
USD / CAD	19,765		(272)		14,556		(24)

USD / EUR	73,507		(1,852)		70,454		(1,104)

USD / DKK	5,099		(137)		10,850		(257)
USD / GBP	—		—		4,028		32

USD / NOK	4,790		(467)		2,352		(81)

USD / SEK	1,880		(72)		2,344		(131)




EUR / GBP	1,200		36		—		—




EUR / NOK	1,099		(8)		—		—
AUD / NZD	17,082		(163)		7,366		(17)




USD / THB	4,310		278		4,500		86



EUR / SEK	2,353		(10)		—		—
	$	132,279	$	(2,563)	$	120,242	$	(1,553)

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


	September 30, 2022				December 31, 2021
	Assets		Liabilities		Assets		Liabilities
Derivatives designated as hedging instruments under ASC 815
Foreign currency forward exchange contracts	$	690	$	391	$	1	$	—


Derivatives not designated as hedging instruments under ASC 815
Foreign currency forward exchange contracts	1,936		4,499		385		1,938
Total derivatives	$	2,626	$	4,890	$	386	$	1,938

The fair values of the company’s foreign currency forward exchange contract assets and liabilities are included in Other Current Assets and Accrued Expenses, respectively in the condensed consolidated balance sheets.

The effect of derivative instruments on Accumulated Other Comprehensive Income (Loss) (OCI) and the condensed consolidated Statements of comprehensive income (loss) was as follows (in thousands):


Derivatives (foreign currency forward exchange contracts) in ASC 815 cash flow hedge relationships	Amount of Gain (Loss) Recognized in Accumulated 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)
Three months ended September 30, 2022
Foreign currency forward exchange contracts	$	59	$	1,275	$	1,002


Nine months ended September 30, 2022
Foreign currency forward exchange contracts	$	2,197	$	1,961	$	1,117


Three months ended September 30, 2021
Foreign currency forward exchange contracts	$	944	$	(309)	$	51


Nine months ended September 30, 2021
Foreign currency forward exchange contracts	$	(643)	$	(1,219)	$	(37)



Derivatives (foreign currency forward exchange contracts) not designated as hedging instruments under ASC 815					Amount of Gain (Loss) Recognized in Income on Derivatives
Three months ended September 30, 2022
Foreign currency forward exchange contracts					$	2,072
Nine months ended September 30, 2022
Foreign currency forward exchange contracts					$	(2,563)
Three months ended September 30, 2021
Foreign currency forward exchange contracts					$	(592)
Nine months ended September 30, 2021
Foreign currency forward exchange contracts					$	(1,315)

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 and in cost of products sold for hedges of inventory purchases. For the three and nine months ended September 30, 2022, net sales were increased by $68,000 and $125,000, while cost of products sold was decreased by $1,263,000 and $1,997,000 for net pre-tax realized gains of $1,331,000 and

$2,122,000, respectively. For the three and nine months ended September 30, 2021, net sales were decreased by $476,000 and $657,000 while cost of products sold was decreased by $92,000 and increased by $746,000 for net realized pre-tax losses of $384,000 and $1,403,000, respectively.

A gain of $2,072,000 and $2,563,000 was recognized in selling, general and administrative (SG&A) expenses for the

three and nine months ended September 30, 2022 compared to a loss of $592,000 and a loss of $1,315,000 for the three and nine months ended September 30, 2021 related to forward contracts not designated as hedging instruments. The forward contracts 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. The right of set off 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

Prior Credit Agreement and ABL 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 Prior Credit Agreement and ABL 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.

During the third quarter of 2022, the company entered into privately negotiated Secured Convertible 2026 Notes of $31,106,000 in aggregate principal amount. Convertible debt conversion liabilities of $1,423,000 were recorded based on initial fair values and these fair values are updated quarterly with the offset to the income statement. Refer to "Long-Term Debt" in the notes to the condensed consolidated financial statements for more detail.

The fair values of the outstanding convertible note derivatives as of September 30, 2022 and their effect on the Statement of Comprehensive Income (Loss) were as follows (in thousands):


			Gain
	Fair Value		Three and Nine Months Ended
	September 30, 2022		September 30, 2022
Secured Convertible 2026 Notes conversion long-term liability	$	473	$	950

The secured convertible 2026 notes conversion liability amounts are included in Other Long-Term Obligations in the company's condensed consolidated balance sheets.