The Company follows the requirements of ASC No. 815, ”Derivatives and Hedging” (“ASC 815”), which requires companies to recognize all of their derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in fair value (i.e. gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging transaction and further, on the type of hedging transaction. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation.

To protect against the increase in value of forecasted foreign currency cash flow resulting mainly from salaries and related benefits and taxes paid in ILS during the year, the Company hedges portions of its anticipated payroll denominated in ILS for a period of one to twelve months with forward and options contracts (the “Hedging Contracts”). Accordingly, when the USD strengthens against the ILS, the decline in present value of future ILS currency expenses is offset by losses in the fair value of the Hedging Contracts. Conversely, when the USD weakens, the increase in the present value of future ILS expenses is offset by gains in the fair value of the Hedging Contracts. These Hedging Contracts are designated as cash flow hedges.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any gain or loss on a derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in current earnings during the period of change.

As of June 30, 2020, and December 31, 2019, the notional value of the Company’s derivative instruments was $8,731 and $3,918, respectively.

F - 15

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 6:DERIVATIVES AND HEDGING ACTIVITES (Cont.)

The fair value of the Company’s outstanding derivative instruments is as follows:

		June 30,		December 31,
	Balance sheet	2020		2019

Derivatives designated as hedging instruments:
Foreign exchange forward contracts and other derivatives	''Prepaid expenses and other current assets''	$	530	$	73
	''Accrued expenses and other liabilities''		2		-
	''Accumulated other comprehensive income (loss)''		521		67

The net gains (losses) reclassified from accumulated other comprehensive loss to the operating expenses are as follows:

	Gain recognized in Statements of Comprehensive Income			Gain (loss) recognized in consolidated statements of Income
	Six months ended June 30,		Statement of Income item	Six months ended June 30,
	2020		Statement of Income item	2020			2019
Derivatives designated as hedging instruments:
Foreign exchange options and forward contracts	$	455	"Operating expenses"	$	(26	)	$	92

Derivatives not designated as hedging instruments:
Foreign exchange options and forward contracts		-	"Financial expenses"		(100	)		196
SWAP		-	"Financial expenses"		-			380

Total	$	455		$	(126	)	$	668