Hedge accounting

Question 1

Hedge accounting required or no?

Answer 1

Not required. Policy choice. Very complex

Question 2

Hedged item

Answer 2

The item entity wishes to protect from exposure to variable risk

Question 3

Eligible hedged items

Answer 3

• Exisitng asset or liab: A/R, A/P
• Unrecognized commitment: Goods not shipped
• Future transaction: Future revenue
• Net investment in foreign operations

Question 4

Hedging instrument

Answer 4

The item to used to reduce risk from the variable

Question 5

Eligible hedging instrument

Answer 5

Derivatives: forward contracts

Non Derivatives: Term deposit

Question 6

Criteria to use hedge accounting

Answer 6

1. Must have an eligible hedging item and hedging instrument
2. Hedging relationship must be formally designated and documented an inception
3. The 3 effectiveness requirements are met (handbook)

Question 7

2 types of hedges

Answer 7

Fair value hedges

Cash flow hedges