Derivatives Hedging Translation Flashcards
(26 cards)
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
What causes a Foreign Currency Transaction G/L?
A change in exchange rates between the functional currency and the transaction currency
Where are Foreign Currency Transaction G/L recorded?
Income Statement
Where are Foreign Currency Translation G/L recorded?
OCI
If the Functional Currency equals the Local Currency - what rate is used for translating Assets and Liabilities?
Current Rate as of the Balance Sheet Date
If the Functional Currency equals the Local Currency - what rate is used for translating Revenues and Expenses?
Weighted Average Exchange Rate for the year
If the Functional Currency equals the Reporting Currency - what Exchangee Rate is used??
Use Weighted Average - Historical Exchange Rates (Inventory and Pre-paid Assets and Property Plant and Equipment) and Current Exchange Rates (Monetary Assets and Liabilities and Inventory @ Market and Trading Securities and Deferred Taxes)
FV Hedge goes to ?
Difference between loss in FVM and gain on hedge = amount recorded in income statement
Must be disclosed about financial instruments
Concentration of credit risk
Carrying Value
Fair Value
Financial instrument to be a derivative for accounting purposes, the financial instrument must:
Have one or more underlyings
determination of the value or settlement amount of a derivative involves a calculation which uses:
An underlying and a notional amount
Qualified derivatives may be used to hedge the cash flow associated with an:
Asset OR Forecasted transaction
How are effective and ineffective portions of a cash flow hedge reported?
Effective: OCI
Ineffective: IS
Risks associated with an interest rate swap agreement:
Risk of losing
Risk of nonperformance by counter party
If NOT practicable for entity to estimate FV of financial instrument, must disclose:
Information pertinent to estimating the fair value of the financial instrument
The reasons it is not practicable to estimate fair value.
Concentration of credit risks disclosed in the:
Notes to the financial statements
Disclosure of the fair values of the entity’s financial instruments is required when:
It is practicable to
estimate those values
Aggregated fair values
are material to the entity
