Derivatives/Hedging/Currency 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
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, ineffective portions reported in earnings
Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.
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 remeasurement gains and losses due to foreign currency translation reported?
On the income statement as Other Income.
How are non-hedging derivatives recorded?
Measured at FV
Changes in FV reported as gains or losses in earnings (income statement)
What is an interest rate swap agreement?
An agreement to swap interest payments but not principals
e.g. an exchange of a variable interest rate for a fixed rate
What is the characteristic of a perfect hedge?
No possibility of future gain or loss
If it is not practicable to estimate a financial instrument’s fair value, what should be disclosed?
Relevant info to estimating the FV (carrying amount, effective interest rate, maturity)
Why it is not practicable to estimate the FV
What is credit risk?
The possibility of loss due to another party’s failure to fulfill his end of the contract
All concentrations of credit risk for all financial instruments need to be disclosed
What is market risk?
The possibility that future changes in market price may decrease a financial instrument’s value
Quantitative info for market risk is encouraged, but not required, to be disclosed
What is the benchmark interest rate?
Rate associated with no risk of default
What is a swaption?
An option for the delivery of a swap contract
What is the central concern regarding whether to recognize or derecognize financial assets?
Control - it determines whether a transfer is accounted for as a sale or a collateralized borrowing
Determination presupposes that assets (and liabilities) can be divided into many components
What is an interest-only strip?
Right to receive some or all of the interest due on some interest-bearing financial asset
What is a cleanup call?
An option held by a servicer to purchase transferred financial assets whenever outstanding assets falls to a level where the cost of servicing those assets becomes burdensome
What is securitization?
The process of turning financial assets into securities
