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Flashcards in Derivatives Hedging Translation Deck (53)
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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?

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