Hedge Accounting Flashcards
Hedge accounting?
Intended to offset temporary profit or loss volatility due to differences in timing or valuation of a hedged item and the hedging instrument.
Fair value hedge
hedge of exposure to changes in fair value where cash flows are fixed, often due to foreign currency fluctuations, so the fair value of the hedged item fluctuates with changes in, for example, the foreign exchange rate.
Cash flow hedge:
hedge of exposure to variability of cash flows resulting from an asset or liability.
the value of item being hedged has uncertainty
may hedge an anticipated transaction or a forecasted transaction
hedging instrument is entered into before the hedged item
When to apply hedge criteria:
eligible hedged item n instrument
formally designated n documented
effectiveness reqs:
eco relationship between item n instrument exists
change in value is not fully due to credit risk
hedge ratio same for both.
eligible hedged item
item that needs to be protected from risk exposure eg. liability or highly probable future transaction
eligible hedged instrument
used to reduce or eliminate risk exposure
eg. derivatives or monetary assets
hedging
any item with a variable component
due from broker
due to broker
due from broker - receiving from broker
due to broker - payable to broker
Net impact on income statement
Equals the amount of Cdn cash paid to the broker for the purchase of goods n u have a payable regardless if CF or FV hedge
Cash Flow Hedge
to do with a forecasted or proposed instrument, so hedged item comes before the hedged instrument (key dif with fv).
G/L put in OCI before hedge item starts recognizing in Net income. then transfer once it starts
transfer from OCI, if inv the amount is made to reduce or increase inv. to amount that is paid to the broker
fair value hedge
cash flows fixed in terms of the foreign currency(so owe 100000US no change but change to CDN has the dif.
