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
Foreign currency gain and loss for note payable
Includes increase/ decrease in principal and interest
Examples of derivative benchmarks
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
Examples of derivatives
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
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
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
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
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
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