Derivatives Hedging Translation

Question 1

Derivatives/Hedging

How are derivatives recorded?

Answer 1

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

Question 2

Derivatives/Hedging

How are unrealized gains/losses on trading securities recorded?

Answer 2

Recorded on income statement

Question 3

Derivatives/Hedging

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

Answer 3

They are included in Other Comprehensive Income.

Question 4

Derivatives/Hedging

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

Answer 4

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

Question 5

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

Answer 5

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

Initially recorded on Balance Sheet at Fair Value

Gains/Losses go to OCI for effective portion of the hedge and to current income for the ineffective portion

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

Question 6

Derivatives/Hedging

Where are gains and losses on foreign currency hedges recorded?

Answer 6

In Other Comprehensive Income (OCI)

Question 7

What disclosures are required for derivative transactions?

Answer 7

Objectives and Strategies

Context to help investor understand the instrument

Risk Management Policies

Complete List of Hedged Instruments

Question 8

Derivatives/Hedging

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

Answer 8

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

Question 9

Derivatives/Hedging

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

Answer 9

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

Question 10

Derivatives/Hedging

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

Answer 10

Use the weighted average exchange rate for the current year.

Question 11

Derivatives/Hedging

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

Answer 11

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

Question 12

Derivatives/Hedging

Where are re-measurement gains and losses due to foreign currency translation reported?

Answer 12

On the income statement as Other Income.

Question 13

What are the 3 elements of a derivative?

Answer 13

1. Has at least one underlying (price, rate, etc) and notional amount (unit of measure) OR a payment provision (if this, then pay)
2. Little or no initial investment
3. Can be settled in cash

Question 14

What are the 4 types of derivatives that could be on the CPA exam?

Answer 14

Option contracts (like non-employee stock options)
Futures contracts (made through clearinghouse, do future transaction at set price)
Forward contracts (futures contact not made through clearinghouse)
Swap contracts (exchange financial instruments)

Question 15

How are derivatives reported on the Balance Sheet?

Answer 15

Either as a liability or an asset; at FMV

Question 16

What are the 3 basic disclosures required for financial instruments?

Answer 16

FV
Carrying amount
Whether the instrument is an asset or liability

Question 17

What is the difference between intrinsic value and time value?

Answer 17

Time value is associated with the time value of money or the anticipated passage of time - whereas intrinsic value is value associated with the amount of benefit that is associated with the derivative terms relative to the market price

Question 18

Which type of hedge applies to a forecasted transaction? Which applies to a firm commitment?

Answer 18

Forecasted - cash flow hedge

Firm commitment - FMV hedge

Question 19

How is a forecasted transaction accounted for?

Answer 19

The forecasted transaction is not recognized until the item is purchased