Specific Transactions, Events, & Disclosures Flashcards
1
Q
What’s the difference between FC Transaction and FC Translation (as they relate to gains/losses)?
A
FC Transactions - changes in values as they relate to Foreign currency exchanges during a transaction.
FC Translation - changes in values as they relate to translating Financial Statements from one currency to another.
2
Q
3 Elements of Derivative Financial Instrument
A
- Has “underlying” (price) and “notional” (quantity of commodity) or payment provision (if, then)
- Requires no or very small initial investment
- Permits or requires settlement in cash rather than delivery of the underlying
3
Q
4 Common Derivatives
A
- Options contract -
- Futures contract -
- Forward contract -
- Swap contract -
4
Q
4 Items Available for Hedge Accounting
A
- Commodity Price Risk -
- Foreign Exchange Risk -
- Interest Rate Risk -
- Credit Risk -
5
Q
2 Types of Risk that Hedging is intended to Mitigate
2 Other Forms of Risk associated with the 1st 2
A
- Fair Value Risk - converts fixed risk into floating
- Cash Flow Risk - converts floating risk into fixed
- Foreign Currency Risk
- Net Investment in Foreign Operations
6
Q
3 Criterial that must be met to create a derivative to hedge against Fair Value Risk
A
- Formal Documentation (6 items)
a. hedging relationship
b. objective and strategy of hedge
c. identification of instrument and hedge item
d. nature of risk being hedged
e. how effectiveness of hedge will be assessed
f. if firm commitment, how recognized - High hedging effectiveness expected, assessment required quarterly and at BS date
- Hedge item must (6 criteria):
a. specifically identified asset, liability, firm commitment
b. exposed to FV changes to could affect NI
c. not reported at FV with changes recognized in NI
d. not investment reported with equity method
e. not in consolidated subsidiary
f. if HTM, risk is credit worthiness, not interest
