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Flashcards in Derivatives Hedging Translation Deck (18)
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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? Pg. 6-3

Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment (company OWNS asset)

Initially recorded on Balance Sheet at Fair Value

Gains/Losses recorded on Income Statement


What is a Cash Flow Hedge? How is it recorded? Pg. 6-5

DENT => Derivative cash flow hedge
Cash flow hedges protect from exposure to fluctuations in cash flows. (Company DOESN'T OWN asset)

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.


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.


What does a financial instrument include? Pg. 6-1

*What is its significance?

C Cash
O Ownership interest in an entity (stock)
D Derivative contracts that create a right and obligation to transfer other financial instruments (stock options)

*If its not a financial instrument, then its not a derivative


Why do we acquire derivatives? Pg. 5-1

a) Investments (option contract) => right but not obligation
b) Arbitrage: take advatage of price to profit with little risk
c) Hedges: reduce or eliminate a risk

*Reported at FMV
*Assets or Liabilities


Fair value hedge VS cash flow hedge Pg. 6-5

Acquired to hedge against an EXISTING asset or liability (guaranteed); Report in I/S

Acquired to hedge against a future transaction (not guaranteed); Report in B/S as OCI (remember DENT)


Definition of Derivatives Pg. 6-1

S Settlement in cash or equiv (net settlement)
U Underlying (variable / rate "UR") AND Notional amount ("NN" number of units)
N No net investment

*Underlying is APPLIED to notional (what will be paid)
*Has to be changing, not for a fixed price => derives value from something else


Examples of derivatives Pg. 6-1
a) Option contract
b) Futures contract
c) Forward contract
d) Interest rate or foreign currency swap

a) has right but NOT the obligation to purchase/sell in the future (put-option & call-option)
b) has right AND the obligation to purchase/deliver in the future at a price set today (happens all the time) => stock
c) has right AND obligation to buy or sell a commodity at a future date for an agreed-upon price (more private agreement)
d) exchange cash flows


How to find ending inventory at base year? (Dollar Value LIFO) Pg. 7-7

*Purpose of dollar value LIFO?

Ending inventory / Inflation factor

*Instead of counting per units, count how much its worth