FAR 56 (2) Flashcards Preview

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Flashcards in FAR 56 (2) Deck (15):
1

T/F: A hedge of a net investment in a foreign operation is classified as a fair value hedge, but the effective gains and losses are recorded in OCI, similar to the accounting for a cash flow hedge.

True

2

T/F: The treatment of a hedge of a recognized asset or liability as either a cash flow hedge or a fair value hedge is determined by management.

True

3

T/F: If the change in fair value of an instrument which hedges a net investment in a foreign operation is equal to or less than the change in fair value of the net investment being hedged, the two changes will be netted against each other to get the translation adjustment gain or loss for the period.

True

4

T/F: If a hedge of a recognized asset is designated as a fair value hedge, the full amount of any gain or loss on the hedge instrument will be recognized in current net income.

True

5

T/F: If a hedge of a recognized asset is designated as a cash flow hedge, the full amount of any gain or loss on the hedge instrument will be recognized in current net income.

False.
The G/L should be deferred and reported as a component of OCI.

6

T/F: The change in fair value of an investment held available-for-sale for a period always will be exactly offset by the change for the same period in a forward contract that hedges the investment.

False.
The net G/L is reported in current NI.
It is very rare for the investment to be exactly offset by the change (a perfect hedge).

7

For forward contracts entered into for speculative purposes, which of the following exchange rates, if any, will be used to measure the contracts prior to maturity?
Spot Rate
Forward Rate

No, yes
The forward rate is used, and the spot rate is not. When a forward contract is entered into for speculative purposes, the contract is measured using the forward rates as of the dates the contract is initiated and at any subsequent measurement date(s) (e.g., balance sheet date). Changes in the forward rate create gains and losses on the forward contract, which are recognized in the period in which the forward rate changes.

8

Which of the following statements concerning the use of a forward contract for speculative purposes is/are correct?

I. The forward contract is not intended to offset an existing risk.
II. Changes in the value of the forward contract are deferred until the contract matures.

I only. When used for speculative purposes, a forward contract is not entered into to offset, or hedge, an existing risk. Rather, the purpose of entering into a speculative forward contract is to make a profit. Statement II is not correct. Changes in the value of a forward contract used for speculative purposes, measured using the forward rate, are recognized in the period in which the forward rate changes and are not deferred until the contract matures.

9

Which one of the following hedges using a forward contract will require the recognition of a new asset or liability if a gain or loss occurs on the hedging instrument?
A. Forecasted transaction hedge.
B. Firm commitment hedge.
C. Recognized asset or liability hedge.
D. Net investment in foreign operations hedge.

B. The hedge of a firm commitment is a fair value hedge, with changes in the fair value of the forward contract (hedging instrument) reported as an increase or decrease to the forward contract and a gain or loss recognized in current income. A change in the fair value of the firm commitment (hedged item) would be recognized as a loss or gain in current income, together with the recognition of a previously unrecognized firm commitment asset or liability for the amount of the change.

10

In which of the following hedges using a forward contract will at least a portion of any currency exchange gain or loss on the hedging instrument be reported as a translation adjustment in other comprehensive income?
A. Forecasted transaction hedge.
B. Firm commitment hedge.
C. Investment in available-for-sale securities hedge.
D. Net investment in foreign operations hedge.

D. The hedge of a net investment in foreign operations is a fair value hedge, but changes in the fair value of the forward contract (hedging instrument) that are equal to or less than the change in the translated value of the financial statements of the foreign operation are reported as a translation adjustment in other comprehensive income. The change in the forward contract reported as a translation adjustment offsets the change in the value of the translated financial statements of the foreign operation, which also are reported as a translation adjustment.

11

T/F: In recording the purchase of a forward contract for speculative purposes, the forward exchange rate should be used.

True

12

T/F: A gain or loss on a forward contract entered into as a hedge of a net investment in a foreign operation can be recognized partly in other comprehensive income and partly in current income.

True

13

T/F: A gain or loss on a forward contract entered into as a cash flow hedge can be recognized partly in current income and partly in other comprehensive income.

True

14

T/F: The reason for entering into a forward contract for speculative purposes is to make a profit.

True

15

T/F: A gain or loss on a forward contract entered into as speculation can be recognized partly in current income and partly in other comprehensive income.

False.
Recognized in current NI.

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