Derivatives Hedging Translation Flashcards Preview

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Flashcards in Derivatives Hedging Translation Deck (19):
1

How are derivatives recorded?

At cost when acquired re-valued to fair value each period on Balance Sheet.

2

How are unrealized gains/losses on trading securities recorded?

Recorded on income statement

3

How are gains and losses on Available for Sale (AFS) securities recorded?

They are included in Other Comprehensive Income.

4

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

5

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 go to OCI for effective portion of the hedge and to current income for the ineffective portion

Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.

6

Where are gains and losses on foreign currency hedges recorded?

In Other Comprehensive Income (OCI)

7

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

8

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

9

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.

10

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.

11

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

12

Where are re-measurement gains and losses due to foreign currency translation reported?

On the income statement as Other Income.

13

What are the 3 elements of a derivative?

1. Has at least one underlying (price, rate, etc) and notional amount (unit of measure) OR a payment provision (if this, then pay)
2. Little or no initial investment
3. Can be settled in cash

14

What are the 4 types of derivatives that could be on the CPA exam?

Option contracts (like non-employee stock options)
Futures contracts (made through clearinghouse, do future transaction at set price)
Forward contracts (futures contact not made through clearinghouse)
Swap contracts (exchange financial instruments)

15

How are derivatives reported on the Balance Sheet?

Either as a liability or an asset; at FMV

16

What are the 3 basic disclosures required for financial instruments?

FV
Carrying amount
Whether the instrument is an asset or liability

17

What is the difference between intrinsic value and time value?

Time value is associated with the time value of money or the anticipated passage of time - whereas intrinsic value is value associated with the amount of benefit that is associated with the derivative terms relative to the market price

18

Which type of hedge applies to a forecasted transaction? Which applies to a firm commitment?

Forecasted - cash flow hedge
Firm commitment - FMV hedge

19

How is a forecasted transaction accounted for?

The forecasted transaction is not recognized until the item is purchased