Derivatives Hedging Translation Flashcards
How are derivatives recorded?
At cost when acquired re-valued to fair value each period on Balance Sheet.
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)
Possible purposes for Accounting for a Derivative
*To speculate (make a profit), *Fair Value Hedge, *Cash Flow Hedge, *Foreign Currency Hedge
Characteristics of A Derivative
(1)Has an Underlying and Notional Amount, (2)No Initial Investment required, (3)Permits or requires settlement in cash, in lieu of delivery of underlying
“Underlying”
specified price or rate (stock price, commodity price, interest rate, foreign currency exchange rate)
