Dervative Instruments and Hedging Activities Flashcards
Derivative Instruments and Hedging Activities
How should all elements of financial statements should be translated?
All elements of financial statements should be translated by using a current exchange rate. For revenues and expenses, an appropriately weighted-average exchange rate for the period may be used to translate those amounts.
Derivative Instruments and Hedging Activities
Where are gains/ losses of fair value hedges and cash flow hedges shown on the financial statements?
Derivative Instruments and Hedging Activities
Fair value hedges = income statement
Cash flow hedges = Other Comprehensive Income
Derivative Instruments and Hedging Activities
Where should foreign currency exchange gain/ loss show up in the financial statements?
Income statement (component of income from continuing operations)
Derivative Instruments and Hedging Activities
True or False
Both sales and wages expense may be translated using a weighted-average exchange rate.
True
Both sales and wages expense may be translated using a weighted-average exchange rate.
Derivative Instruments and Hedging Activities
True or False
A hedge of a purchase commitment is considered a fair value hedge.
True
A hedge of a purchase commitment is considered a fair value hedge (not a cash flow hedge)
Derivative Instruments and Hedging Activities
True or False
If a derivative does not qualify as a hedge, changes in its value must be reported in quarterly earnings.
True
If a derivative does not qualify as a hedge, changes in its value must be reported in quarterly earnings.
Derivative Instruments and Hedging Activities
True or False
Speculative contracts qualify as hedges
False
Speculative contracts DO NOT qualify as hedges and any gain or loss must be reported in earnings.
Derivative Instruments and Hedging Activities
Where are translations reported on the financial statements?
Accumulated comprehensive income
Derivative Instruments and Hedging Activities
Where are remeasurements reported on the financial statements?
Income Statement
Derivative Instruments and Hedging Activities
True or False
All elements of financial statements should be translated by using a current exchange rate. For revenues and expenses, an appropriately weighted-average exchange rate for the period may be used to translate those amounts.
True
All elements of financial statements should be translated by using a current exchange rate. For revenues and expenses, an appropriately weighted-average exchange rate for the period may be used to translate those amounts.
Derivative Instruments and Hedging Activities
What are derivatives?
Derivatives are financial instruments that derive their value from changes in a benchmark based on stock prices, interest rates, mortgage rates, currency rates, or some other agreed-upon base.
Derivative Instruments and Hedging Activities
True or False
If a derivative dos not qualify as a hedging instrument, then its gains or losses must be reported and recognized in current earnings.
True
If a derivative does not qualify as a hedging instrument, then its gains or losses must be reported and recognized in current earnings.
Derivative Instruments and Hedging Activities
What do derivative instruments contain?
- One or more underlyings and one or more notional amounts.
- No initial net investment or smaller net investment than required for contracts with an expected similar response to market changes
- Terms that require or permit net settlement, net settlement by means outside the contract, and delivery of an asset that is substantially the same as net settleent.
Derivative Instruments and Hedging Activities
Define embedded derivative
An embedded derivative is a feature of a financial instrument or other contract, which if the feature stood alone, would meet the definition of a derivative.
Derivative Instruments and Hedging Activities
Describe bifurcation
Bifurcation is the process of separating an embedded derivative from its host contract. This process is necessary so that hybrid instruments can be separated into their component parts, each being accounted for using the appropriate valuation techniques.
Derivative Instruments and Hedging Activities
What are the four types of hedges that hedge accounting is permitted for?
- Unrecognized firm commitments
- Available for sale securities
- Foreign currency denominated hedge forecasted transactions.
- Net investments in foreign operations.
Derivative Instruments and Hedging Activities
True or False
Fair Value hedges will recognize gains and losses fro the effective portion of the hedging instrument in each reporting period. Cash flow hedges will recognize gains and losses for the effect portion of the hedging instrument in other comprehensive income
True
Fair Value hedges will recognize gains and losses fro the effective portion of the hedging instrument in each reporting period. Cash flow hedges will recognize gains and losses for the effect portion of the hedging instrument in other comprehensive income
Derivative Instruments and Hedging Activities
True or False
A hedge of a recognized asset or liability is a fair value hedge or a cash flow hedge, not a foreign currency hedge.
True
A hedge of a recognized asset or liability is a fair value hedge or a cash flow hedge, not a foreign currency hedge.
Derivative Instruments and Hedging Activities
To prepare a translated statement of cash flows, the assets and liabilities must be translated at what rate?
The assets and liabilities must be translated at the weighted-average rate (not the rate at the balance sheet date)
