Dervative Instruments and Hedging Activities

Question 1

Derivative Instruments and Hedging Activities

How should all elements of financial statements should be translated?

Answer 1

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.

Question 2

Derivative Instruments and Hedging Activities

Where are gains/ losses of fair value hedges and cash flow hedges shown on the financial statements?

Answer 2

Derivative Instruments and Hedging Activities

Fair value hedges = income statement

Cash flow hedges = Other Comprehensive Income

Question 3

Derivative Instruments and Hedging Activities

Where should foreign currency exchange gain/ loss show up in the financial statements?

Answer 3

Income statement (component of income from continuing operations)

Question 4

Derivative Instruments and Hedging Activities

True or False

Both sales and wages expense may be translated using a weighted-average exchange rate.

Answer 4

True

Both sales and wages expense may be translated using a weighted-average exchange rate.

Question 5

Derivative Instruments and Hedging Activities

True or False

A hedge of a purchase commitment is considered a fair value hedge.

Answer 5

True

A hedge of a purchase commitment is considered a fair value hedge (not a cash flow hedge)

Question 6

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.

Answer 6

True

If a derivative does not qualify as a hedge, changes in its value must be reported in quarterly earnings.

Question 7

Derivative Instruments and Hedging Activities

True or False

Speculative contracts qualify as hedges

Answer 7

False

Speculative contracts DO NOT qualify as hedges and any gain or loss must be reported in earnings.

Question 8

Derivative Instruments and Hedging Activities

Where are translations reported on the financial statements?

Answer 8

Accumulated comprehensive income

Question 9

Derivative Instruments and Hedging Activities

Where are remeasurements reported on the financial statements?

Answer 9

Income Statement

Question 10

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.

Answer 10

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.

Question 11

Derivative Instruments and Hedging Activities

What are derivatives?

Answer 11

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.

Question 12

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.

Answer 12

True

If a derivative does not qualify as a hedging instrument, then its gains or losses must be reported and recognized in current earnings.

Question 13

Derivative Instruments and Hedging Activities

What do derivative instruments contain?

Answer 13

1. One or more underlyings and one or more notional amounts.
2. No initial net investment or smaller net investment than required for contracts with an expected similar response to market changes
3. 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.

Question 14

Derivative Instruments and Hedging Activities

Define embedded derivative

Answer 14

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.

Question 15

Derivative Instruments and Hedging Activities

Describe bifurcation

Answer 15

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.

Question 16

Derivative Instruments and Hedging Activities

What are the four types of hedges that hedge accounting is permitted for?

Answer 16

1. Unrecognized firm commitments
2. Available for sale securities
3. Foreign currency denominated hedge forecasted transactions.
4. Net investments in foreign operations.

Question 17

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

Answer 17

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

Question 18

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.

Answer 18

True

A hedge of a recognized asset or liability is a fair value hedge or a cash flow hedge, not a foreign currency hedge.

Question 19

Derivative Instruments and Hedging Activities

To prepare a translated statement of cash flows, the assets and liabilities must be translated at what rate?

Answer 19

The assets and liabilities must be translated at the weighted-average rate (not the rate at the balance sheet date)