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?
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
What is a Cash Flow Hedge? How is it recorded?
Cash flow hedges protect from exposure to fluctuations in cash flows.
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
What causes a Foreign Currency Transaction G/L?
A change in exchange rates between the functional currency and the transaction currency
Where are Foreign Currency Transaction G/L recorded?
Income Statement
Where are Foreign Currency Translation G/L recorded?
OCI
If the Functional Currency equals the Local Currency - what rate is used for translating Assets and Liabilities?
Current Rate as of the Balance Sheet Date
If the Functional Currency equals the Local Currency - what rate is used for translating Revenues and Expenses?
Weighted Average Exchange Rate for the year
If the Functional Currency equals the Reporting Currency - what Exchangee Rate is used??
Use Weighted Average - Historical Exchange Rates (Inventory and Pre-paid Assets and Property Plant and Equipment) and Current Exchange Rates (Monetary Assets and Liabilities and Inventory @ Market and Trading Securities and Deferred Taxes)
Re-measurement & Translation of foreign currency (from the web.
So if the foreign currency is the functional currency, you simply need to translate from the foreign currency to the reporting currency (1 step). If the reporting currency is the functional currency, you will want to remeasure from the foreign currency to the reporting (functional) currency (1 step). If the foreign, reporting, and functional currency are all different, you need to remeasure from the foreign currency to the functional currency and then translate from the functional currency to the reporting currency (2 steps). The way I remember what to do is by remembering that you always remeasure into the functional currency.
When you use the remeasurement method, you use the historical rate method and the foreign currency impact goes through the income statement as a Remeasurement Gain or Loss.
If you are translating, you use the current rate method and the foreign currency impact goes through the balance sheet in Other Comprehensive Income (OCI) as a Cumulative Translation Adjustment (CTA).
Investments in debt and equity securities
denominated in a foreign currency
(from web)
Debt securities
classified as held to maturity are considered monetary assets; the amount to be
received at maturity is fixed and does not depend on future prices. Debt securities
classified as available for sale or trading are considered nonmonetary assets; the
amount to be received depends on future prices. Similarly, an equity security
investment classified as either available for sale or trading is considered a
nonmonetary asset.
Trading securities.
Investments in debt securities that are classified as trading and
equity securities that have readily determinable fair values that are classified as
trading shall be measured subsequently at fair value in the statement of financial
position. Unrealized holding gains and losses for trading securities shall be
included in earnings.
Available-for-sale securities.
Investments in debt securities that are classified as
available for sale and equity securities that have readily determinable fair values
that are classified as available for sale shall be measured subsequently at fair value
in the statement of financial position. Unrealized holding gains and losses for
available-for-sale securities (including those classified as current assets) shall be
excluded from earnings and reported in other comprehensive income until
realized except as indicated in the following sentence. All or a portion of the
unrealized holding gain and loss of an available-for-sale security that is
designated as being hedged in a fair value hedge shall be recognized in earnings
during the period of the hedge
Held to maturity
(debt securities) Monetary
Measured at amortized cost Foreign currency transaction gain or loss is recognized in the income statement
Available for sale (debt or equity securities) Nonmonetary
Measured at fair value with changes in fair value recorded in other comprehensive income Changes in fair value attributable to changes in the exchange rate between the foreign currency and the functional currency are recognized with other changes in fair value in other comprehensive income
Trading
(debt or equity
securities)
Nonmonetary
Measured at fair value with changes in value recorded in the income statement Changes in fair value attributable to changes in the exchange rate between the foreign currency and the functional currency are recognized with other changes in fair value in the income statem
Translation: CTA ( Cumulative Translation Adjustment Account) which is a separate component of other comprehensive income
(OCI)
If an entity’s functional currency is a foreign currency, translation adjustments result
from the process of translating the entity’s financial statements into the reporting
currency. Translation adjustments shall not be included in determining net income
but shall be reported in other comprehensive income.
measurement and remeasurement
foreign exchange gains and losses that are
recorded in net income as a result of the measurement and remeasurement processes.
