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 for:
- Inventory @ cost
- Pre-paid Assets
- Property Plant and Equipment
Current Exchange Rates for:
- Monetary Assets and Liabilities
- Inventory @ Market
- Trading Securities
- Deferred Taxes
What is a derivative?
2 parties, 1 futures contract
Goal is to minimize risk by agreeing to amount sold and price ahead of time
