FAR 50 - Effectiveness, Disclosures, and IFRS Hedging Flashcards Preview

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Flashcards in FAR 50 - Effectiveness, Disclosures, and IFRS Hedging Deck (8):
1

Derivatives used for hedging purposes that require disclosure of reclassifications of accumulated other comprehensive income are most likely related to which of the following hedging purposes, if any?

I. Fair value hedges.
II. Cash flow hedges.

II only. When derivatives are used as cash flow hedges, an amount of gain or loss can be deferred in other comprehensive income and subsequently become part of accumulated other comprehensive income. Amounts of accumulated other comprehensive income (on the hedging instrument) will be reclassified to income when the hedged item affects income.

2

Which one of the following is not a required disclosure for derivatives used as fair value hedges?
A. The amount of net gain or loss recognized in earnings during the period.
B. The location in the financial statements where any gain or loss is reported.
C. The net gain or loss in earnings from firm commitment hedges that no longer qualify for hedge treatment.
D. The amount of gain or loss arising during the period that was deferred.

D. When derivatives are used for fair value hedges, the amount of gain or loss arising during the period that was deferred is not a required (or relevant) disclosure. When fair value hedges are used, any resulting gain or loss is recognized in current income, not deferred.

3

Which of the following statements concerning disclosure requirements for derivatives used as cash flow hedges is/are correct?

I. The net gain or loss recognized in earnings during the period must be disclosed.
II. The amount of gain or loss deferred in other comprehensive income must be disclosed.
III. A listing of derivatives used for cash flow hedges and the amount of each must be disclosed.

I and II only are required. III. is not required.

4

Which of the following concepts is not part of the definition of a derivative under IFRS?
A. The instrument has one or more underlyings.
B. The instrument requires little or no initial net investment.
C. The instrument permits net settlement.
D. The instrument has a notional amount.

D. The definition of a derivative under IFRS does not include the concept of notional amount - a specified unit of measure.

5

Which of the following statements, if either, concerning differences between U.S. GAAP and IFRS in accounting for hedges is/are correct?

I. IFRS permits hedging a forecasted business combination that is subject to foreign exchange risk; U.S. GAAP does not permit hedging in that case.
II. IFRS permits hedging part of the life of a hedged item; U.S. GAAP does not permit hedging of part of the life of a hedged item.

Both I and II. IFRS permits (1) hedging a forecasted business combination that is subject to foreign exchange risk, and (2) hedging part of the life of a hedged item. U.S. GAAP does not permit hedging in either case.

6

T/F: Under U.S. GAAP, the risk association with a business combination cannot be hedged.

True

7

T/F: IFRS does not allow the short cut method.

True

8

T/F: Under IFRS, the interest rate needs to be a benchmark rate in order to be hedged.

False.

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