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FAR > Derivatives/Hedging/Currency > Flashcards

Derivatives/Hedging/Currency Flashcards

1
Q

How are derivatives recorded?

A

At cost when acquired, re-valued to fair value each period on Balance Sheet.

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2
Q

How are unrealized gains/losses on trading securities recorded?

A

Recorded on income statement

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3
Q

How are gains and losses on Available for Sale (AFS) securities recorded?

A

They are included in Other Comprehensive Income.

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4
Q

What is a Fair Value Hedge? How is it recorded?

A

Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment

Initially recorded on Balance Sheet at Fair Value

Gains/Losses recorded on Income Statement

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5
Q

What is a Cash Flow Hedge? How is it recorded?

A

Cash flow hedges protect from exposure to fluctuations in cash flows.

Initially recorded on Balance Sheet at Fair Value

Gains/Losses going to OCI, ineffective portions reported in earnings

Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.

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6
Q

Where are gains and losses on foreign currency hedges recorded?

A

In Other Comprehensive Income (OCI)

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7
Q

What disclosures are required for derivative transactions?

A

Objectives and Strategies

Context to help investor understand the instrument

Risk Management Policies

Complete List of Hedged Instruments

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8
Q

How do transactions denominated in in a currency other than a company’s functional currency affect the income statement?

A

Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations

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9
Q

For the balance sheet, which date’s translation rate is used to report assets and liabilities?

A

The current translation rate as of the balance sheet date is used to report assets and liabilities.

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10
Q

Which date’s currency translation rate is used for the reporting of revenue and expense transactions in a foreign currency?

A

Use the weighted average exchange rate for the current year.

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11
Q

If the functional currency is the reporting currency, which exchange rate is used on the foreign currency financial statements?

A

Foreign Currency Financial Statements are remeasured into the Reporting Currency (Dollar) using the weighted-average exchange rate

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12
Q

Where are remeasurement gains and losses due to foreign currency translation reported?

A

On the income statement as Other Income.

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13
Q

How are non-hedging derivatives recorded?

A

Measured at FV

Changes in FV reported as gains or losses in earnings (income statement)

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14
Q

What is an interest rate swap agreement?

A

An agreement to swap interest payments but not principals

e.g. an exchange of a variable interest rate for a fixed rate

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15
Q

What is the characteristic of a perfect hedge?

A

No possibility of future gain or loss

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16
Q

If it is not practicable to estimate a financial instrument’s fair value, what should be disclosed?

A

Relevant info to estimating the FV (carrying amount, effective interest rate, maturity)

Why it is not practicable to estimate the FV

17
Q

What is credit risk?

A

The possibility of loss due to another party’s failure to fulfill his end of the contract

All concentrations of credit risk for all financial instruments need to be disclosed

18
Q

What is market risk?

A

The possibility that future changes in market price may decrease a financial instrument’s value

Quantitative info for market risk is encouraged, but not required, to be disclosed

19
Q

What is the benchmark interest rate?

A

Rate associated with no risk of default

20
Q

What is a swaption?

A

An option for the delivery of a swap contract

21
Q

What is the central concern regarding whether to recognize or derecognize financial assets?

A

Control - it determines whether a transfer is accounted for as a sale or a collateralized borrowing

Determination presupposes that assets (and liabilities) can be divided into many components

22
Q

What is an interest-only strip?

A

Right to receive some or all of the interest due on some interest-bearing financial asset

23
Q

What is a cleanup call?

A

An option held by a servicer to purchase transferred financial assets whenever outstanding assets falls to a level where the cost of servicing those assets becomes burdensome

24
Q

What is securitization?

A

The process of turning financial assets into securities

25
Q

What are wash sales?

A

The selling of a financial asset right before or after purchasing one of the same kind

Done for tax purposes, to gain a deduction based on an unrealized loss

26
Q

What determines when outstanding checks are reported, their recording date or their mailing date?

A

Mailing date

27
Q

If a company receives a note receivable in exchange for a sale of goods, how is the interest income recorded?

A

Recorded as sales revenue, not interest revenue

28
Q

How is interest revenue recorded?

A

Difference between received amount of money and PV of loan – not the face value

29
Q

When a note receivable is discounted to PV, how is it recorded?

A

Difference between the discount and the PV is recorded as a deferred charge

30
Q

If a loan is repaid in equal payments, part interest and part principal, and if the loan is discounted to have a different effective interest rate than the stated rate, how is interest revenue recorded?

A

(Face amount) / (PV factor @ stated rate) = annual payment

(Annual payment) x (PV factor @ effective rate) = PV of note

Difference between total revenue and PV = interest revenue

31
Q

If a note receivable is discounted to a third-party, discounted at a specific effective interest rate, what is another name for that rate?

A

Discount rate

32
Q

If an AFS security has a permanent decline in FV, how is it recorded?

A

A REALIZED loss reported in income (NOT OCI)

Asset is written down to FV

33
Q

If a security is transferred from the trading category to the AFS category, hwo is it recorded?

A

Any loss in FV (permanent or temporary) is counted as a REALIZED loss and included in income (NOT OCI)

34
Q

Should significant credit risk be disclosed only for financial instruments with credit risk?

A

No – should be disclosed for ALL financial instruments

35
Q

If an option changes in value (whether intrinsic or time value), how is it recorded?

A

Changes in either kind of value are reported in earnings

FAR (26 decks)

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