Derivatives Hedging Translation Flashcards Preview

FAR 2014 > Derivatives Hedging Translation > Flashcards

Flashcards in Derivatives Hedging Translation Deck (53):

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

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.


When are 39 and 60 day rates used

Forward contracts


Foreign currency gain and loss for note payable

Includes increase/ decrease in principal and interest


Examples of derivative benchmarks

Stock prices
Interest rates
Mortgage rates
Currency rates
Commodity prices
Other agreed upon rates


What must derivative investments contain

One or more underlyings and notional amounts
No initial net investment or smaller net investment than required for similar response contracts


What is an underlying

Any financial or physical variable that has either observable changes or objectively verifiable changes


What is an in the money call option

Price of underlying is greater than strike or exercise price


What are notional amounts

Are the referenced associated asset or liability that are commonly a number of units such as barrels of oil


Name hedging instrument disclosures

Objectives and strategies
Context to understand instrument
Risk management policies
List of hedged instruments


Examples of exclusions from definition of derivative

Adjustable rate loans
Equity securities


Examples of derivatives

Futures contracts
Credit index contracts
Interest rate swaps


What is required for bifurcation of derivative

Must meet the definition of derivative
Have economic characteristics and risks not closely and clearly related to host contract


How can election to not bifurcate be made? How is it recorded?

Election made on instrument by instrument basis
Recorded at FV


Disclosure requirements if not bifurcating

Separate line item for FV and non-FV instrument on B/S or
Aggregate amount of all hybrid instruments with amount of hybrid instruments at FV


Hedge accounting permitted for

Unrecognized firm commitments
AFS securities
Foreign currency denominated hedge forecasted transactions
Net investment in foreign operations


Hedging instrument general criteria

Sufficient documentation required at beginning of process
Must be highly effective throughout life


Criteria to qualify unrecognized firm commitment as hedged item

Must bind both parties
Specific with respect to all significant items
Contains net performance clause that makes performance probable


Recording gain or loss in FV and cash flow hedge

FV hedge - Gain or loss in earnings
Cash flow hedge - effective portion to OCI, ineffective to reported in cumulative basis to reflect lesser of gain or loss on derivative or cumulative gain or loss from and in expected cash flows


Derivatives meet definition of

Asset and liability and recorded on balance sheet


Examples of foreign currency hedges

Unrecognized firm commitment
AFS securities
Foreign currency denominated transactions
Net investment in foreign operations reported as translation adjustment


Rates used in forward contract gain and loss

Use forward rate at date entered into at balance sheet date


Rates used for foreign current valuation of asset or liability

Spot rate


Gain and loss treatment of forward contract to speculate

Gain or loss included in earnings each period


Examples of off-balance sheet risk

Outstanding loan commitments
Recourse obligations on receivables
Futures contracts


Disclosures required if estimating FV of instrument not practicable

Information pertinent to estimating FV
Reasons it is not practicable


Required Disclosure of concentrations of credit risk

Disclosures for all financial instruments

Include info on shared activity region, economic activity, amount of loss if concentrated parties failure to perform, info on entity's collateral policy


IFRS recognition of cash flows and hedge of net investment

Accounted for in OCI


If functional currency of subsidiary is equal to foreign currency how to translate at what rate

Asset and liabilities translated at current rates


If functional currency of subsidiary is US dollar remeasure using

Remeasure at historical and current rates


How to translate revenue and expense

Use weighted average of current rates


How are accumulated gains or losses on certain foreign currency statements reported

As component of stockholder equity entitled OCI


Where are translation adjustments from translation of foreign currency statement

Accumulated OCI
Stockholder equity


Where to allocate gain or loss when functional currency equals reporting currency

Remeasurement recorded in net income


What accounts to use historical rates on when company's books not functional currency

Historical rates for inventories at cost and marketable equity securities reported at cost


What is Remeasurement gain or loss

Where the functional currency is converted to accounting currency. Gain or loss to net income


What is he functional currency

Currency of primary economic environment in which the entity operates, currency of environment in which an entity primary generates and expends cash


Types of currencies under IFRS

Foreign, functional, and presentation


How does IFRS define functional currency

Currency in which company primarily operates


Under IFRS, if functional currency equals presentation currency how is gain or loss reported

Translation gain or loss reported in current earnings on income statement


IFRS requirements regarding foreign currency translation

Nonmonetary items measured at historical cost use historical rates
Monetary items translated at year end spot rate
Functional currency is same as presentation currency gain or loss deferred


If the functional currency is the foreign currency what rate method is used? At what rate are assets and liabilities measured? Owners equity? Revenue and expenses?

Current rate method

Assets and liabilities - current rates
Revenues and expenses - weighted average rates
Equity - historical rates


If the functional currency is the reporting currency (US dollar) what method is used? What rate is used for assets and liabilities? Revenue and expenses? Equity?

Remeasurement method
Monetary assets and liabilities - current rates
Nonmonetary assets and liabilities - historical rates
Revenues and expenses - weighted average rates
Except depreciation - historical rates
Equity - historical rates