Financial Instruments - 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
Converts fixed risk to floating.
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.
Converts floating risk to fixed.
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
For the balance sheet which date’s translation rate is used to report assets and liabilities?
The current translation rate as of the balance sheet date is used to report assets and liabilities.
Which date’s currency translation rate is used for the reporting of revenue and expense transactions in a foreign currency?
Use the weighted average exchange rate for the current year.
If the functional currency is the reporting currency which exchange rate is used on the foreign currency financial statements?
Foreign Currency Financial Statements are remeasured into the Reporting Currency (Dollar) using the weighted-average exchange rate
Where are re-measurement gains and losses due to foreign currency translation reported?
On the income statement as Other Income.
Define financial instruments.
Includes a diverse variety of items - Cash, evidence of an ownership interest in an entity (like investments in other companies), contracts which result in exchange of cash/ownership interest of an entity AND impose on one party a contractual obligation and on another party a contractual right (A/P or A/R)
What are derivatives?
A financial instrument that:
1) has an underlying (specified price, rate or other variable) and notional amount (how much) or payment provision(if/then clause)
2) Requires no or very small initial investment, AND
3) Permits or requires settlement in cash, in lieu of delivery of the subject matter of the contract.
Common derivatives - option contracts, futures contracts
Explain Embedded derivative instruments
When a host contract (debt, lease or equity instrument) that has a derivative “embedded” into the contract.
An embedded derivative should be separated from host contract only if the derivative is not CLEARLY and CLOSELY RELATED to the host contract. If separated, derivative recorded at FMV, host contract accounted for based on the type of instrument it is.
Clearly and closely related derivatives do not have to be bifurcated from host derivative
