Derivatives Hedging Translation Flashcards
How are derivatives recorded?
At cost when acquired re-valued to fair value each period on Balance Sheet.
How are unrealized gains/losses on trading securities recorded?
Recorded on income statement
How are gains and losses on Available for Sale (AFS) securities recorded?
They are included in Other Comprehensive Income.
What is a Fair Value Hedge? How is it recorded? Pg. 6-3
Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment (company OWNS asset)
Initially recorded on Balance Sheet at Fair Value
Gains/Losses recorded on Income Statement
What is a Cash Flow Hedge? How is it recorded? Pg. 6-5
DENT => Derivative cash flow hedge
Cash flow hedges protect from exposure to fluctuations in cash flows. (Company DOESN’T OWN asset)
Initially recorded on Balance Sheet at Fair Value
Gains/Losses going to OCI
Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.
Where are gains and losses on foreign currency hedges recorded?
In Other Comprehensive Income (OCI)
What disclosures are required for derivative transactions?
Objectives and Strategies
Context to help investor understand the instrument
Risk Management Policies
Complete List of Hedged Instruments
How do transactions denominated in in a currency other than a company’s functional currency affect the income statement?
Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations
For the balance sheet which date’s translation rate is used to report assets and liabilities?
The current translation rate as of the balance sheet date is used to report assets and liabilities.
Which date’s currency translation rate is used for the reporting of revenue and expense transactions in a foreign currency?
Use the weighted average exchange rate for the current year.
If the functional currency is the reporting currency which exchange rate is used on the foreign currency financial statements?
Foreign Currency Financial Statements are remeasured into the Reporting Currency (Dollar) using the weighted-average exchange rate
Where are re-measurement gains and losses due to foreign currency translation reported?
On the income statement as Other Income.
What does a financial instrument include? Pg. 6-1
*What is its significance?
COD
C Cash
O Ownership interest in an entity (stock)
D Derivative contracts that create a right and obligation to transfer other financial instruments (stock options)
*If its not a financial instrument, then its not a derivative
Why do we acquire derivatives? Pg. 5-1
a) Investments (option contract) => right but not obligation
b) Arbitrage: take advatage of price to profit with little risk
c) Hedges: reduce or eliminate a risk
- Reported at FMV
- Assets or Liabilities
Fair value hedge VS cash flow hedge Pg. 6-5
Acquired to hedge against an EXISTING asset or liability (guaranteed); Report in I/S
Acquired to hedge against a future transaction (not guaranteed); Report in B/S as OCI (remember DENT)
