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Foreign currency transactions

Purchases A/P
Sales A/R
Currency exchanging hands is not US Dollars


Foreign Currency Disclosures - ASC 830

1. Aggregate transation gain(loss) that is included in the entity's NI
2. Significant rate changes subsequent to the date of the financial statements including effects on unsettled foreign currency transactions. As of the B/S date you have to remeasure the payables and receivables according to the exchange rate for any particular foreign currency.


Monetary Unit Assumption

All F/S have to be in terms of the U.S. Dollar.


Spot rate

Exchange rate "on the spot"
Exchange rate as of the B/S date


When the foreign currency transaction rate applies

When money exchanging hands is not in US Dollars.

When there's a sale and there's a title of transfer. Not when an order is placed.


Derivative Instruments

Derive their value as a financial instrument from something outside the instrument itself.
3 characteristics must be present for a financial instrument or other contract to be considered a derivative
1. one or more Underlying
2. one or more Notional
3. Settlement amount

The financial instrument or other contract requires no initial net investment or an inital net invest that is smaller than would be required (it's cheap)

The terms of financial instrument or other contract do one of the following in regard to settlement:
1. Require or permit net settlement
2. Provide for the delivery of an asset


How to measure Derivatives

Fair value


Derivatives uses

1. Speculation
2 Hedging


Derivatives for Speculation

Unrealized holding gains and losses are reported in income from continuing operations. plus other revs and gains or minus other exps and losses


Fair Value Hedge

Hedge of the exposure to changes in the fair value of a) recognized asset or liability, or b) an unrecognized firm commitment (PO or contract).
Unreal gains and losses - Income from Cont'd ops. Plus other revs gains, Minus other exps and losses


Cash Flow Hedge

A hedge of the exposure to variability in the cash flows of a) a recognized asset or liability, or b) a forecasted transaction (haven't ordered anything)

Unreal gains and losses (effective portion) - Other comprehensive Income


Foreign Currency Hedge

A hedge of foreign currency exposure of a) an uncrecognized firm commitment (PO), b) avail-for-sale security (both of these are treated as a Fair value hedge), c) a forecasted transaction, or d) a net investment in a foreign operation (both of these are treated as Cash Flow hedges)


How to treat a Derivative instrument that does not qualify under any of the three categories

The gains and losses must be reported and recognized in current earnings. Income from Continuing Ops



Any financial or physical variable that has either observable changes or objectively varifiable changes (commodity prices, interest rates, exchange rate..) the thing that changes that causes the risk


Notional amounts

the "number of currency or other units" specified in the financial instrument or other contract. (bushels of wheat, shares of stock)


Settlement amount

of financial instruments or other contracts is calculated using the underlying(s) and notional amount(s) in some combination
as simple as multiplying the fair value of a stock times a speicified number of shares



The process of seperating an embedded derivative from its host contract. This process is necessary so that hybrid instruments can be seperated into their component part, each being accounted for using the appropriate valuation techniques


Criteria to determine if Bifurcation must occur

All three must be met
1. The embedded derivative meets the definition of a derivative
2. The hybrid instrument is not regularly recorded at fair value, with changes reported in current earnings.
3. The economic characteristics and risks of the embedded derivative instrument are not "clearly and closely related" to the economic characteristics and risks of the host contract.
ex. Convertible debt (investor's point of view) investment in a bond and stock option


How to value Bifurcations

Holder of a hybrid instrument normally requiring bifurcation can make the election not to bifurcate the instrument, instead the entire instrument is valued at fair value.
Unrealized gains/losses are reported in earnings each year, Income from Cont'd operations.


When elected not to bifurcate a hybrid instrument, how is this disclosed on the F/S

1. As seperate line items for the fair value and non-fair value instruments on the balance sheet.
2. As an aggregate amount of all hybrid instruments with the amount of the hybrid instruments at fair value shown in parantheses.


Highly effective hedge

Hedge will offset any gains or losses on the of the hedging item by 80%-125% of that change.


Criteria for unrecognized firm commitment to qualify as a hedged item

1. binding on both parties
2. specific with respect to all significant terms
3. contains a nonperformance clause


Cash flow hedge

Effective Portion- reported in OCI
Ineffective Portion and/or excluded components are reported on a cumulative basis - Income from continuing operations.


Foreign Currency Hedge - Unrecognized Firm Commitment

PO or contract.
treated as a FV Hedge
Unreal gains and losses - Income from Cont'd operations


Foreign Currency Hedge - Avail for sale securities

Treated as a fair value hedge
Unreal gains/losses - Income from cont'd operations


Foreign Currency Hedge - Foreign currency denominated forecasted transactons

Treated as a CF Hedge
Unreal gains/losses - Effective Portion- OCI
Ineffective Portion - Income from Con't ops


Foreign Currency Hedge- Net investments in foreign operations

Treated as a CF Hedge
Unreal gains/losses - Effective Portion- OCI
Ineffective Portion - reported on a cumulative basis to reflect the lesser of the cumulative gain/loss on the derivative or the cumulative gain/loss from the change in expected cash flows from the hedged instrument.


Hedges held for Speculative purposes

unrealized gains/losses - Income from continuing operations


Disclosures for Financial Instruments both derivative and non derivative that are used as hedging instruments

Objectives and the stragies for achieving them
Context to understand the instrument
Risk management policies and
A list of hedged instruments.


Fair value and Concentration of Credit Risk Disclosures of Financial Instruments other than Derivatives

Disclosures of FVs of financial instruments are required if it is practicable to estimte fair value.
Disclosures of concentration of credit risk is required.


Credit risk

The risk that a loss will occur because parties to the instrument do not perform as expected.


Off-balance-sheet risk

the possible amount of loss from an instrument that is not reflected on the B/S.


Market risk

the risk that future changes in market prices may make a financial instrument less valuable.


IFRS Hedging Instruments

Fair value hedge - unreal G/L profit and loss (income from cont'd operations.
Cash flow hedge - unreal G/L Other comp Income
Hedge of a net investment in operations - unreal G/L - Other comp Income


At the money

price of the underlying is equal to the strike or exercise price.


Embedded Derivative

A feature on a financial instrument or other contract, which if it stood alone, would meet the definition of a derivative.


Firm commitment

An agreement with an unrelated party, binding on both, usually legally enforceable, specifying all significant terms and including a disincentive for nonperformance sufficient to make a performance likely.


Forecasted transaction

A transaction expected to occur for which there is no firm commitment, and thus, which gives the entity no present rights or obligaitons. Forecasted transactions can be hedged and special hedge accounting can be applied.


In the money

A call option is in the money if the price of the underlying is greater than the strike or exercise price of the underlying.


Forward exchange contract

An agreement to exchange at a specified future date currencies of different countries at a specified rate (forward rate)


Intrinsic value

With regard to call (put) options, it is the larger of zero or the spread between the stock (exercise) price and the exercise (stock) price.


Out of the money

Call option is out of the money if they strike or exercise price is greater than the price of the underlying.
A put option is out of the money if the price of the underlying is greater than the strike or exercise price.


Put option

provides the holder the right to sell the underlying at an exercise or strike price, anytime during the option term. A gain accrues to the holder as the market price of the underlying falls below the strike price.



Forward based contract or agreement generallhy between two counterparties to exchange streams of cash flows over a specified period in the future.


Hedge acounting is permitted for (types of hedges)

Unrecognized firm commitments
Avail-for-sale securities
Foreign currency denominated hedge forecasted transactions
Net investments in foreign operations


General criteria for a hedging instrument

Sufficient documentation must be provided at the beginning of the process and the hedge must be "highly effective" throughout its life.


Forward Contract

An agreement between two parties to buy and sell a specific quantity of a commodity, foreign currency, or financial instrument at an aggregated upon price, with delivery and/or settlement at a designated future date. Not formally regulated by an organized exchange, each party to the contract is subject to the default of the other party.


Futures Contract

Forward based contract to make or take delivery of a designated financial instrument, foreign currency or commodity during a designated period, at a specified price or yield. Frequently has provisions for cash settlement. Traded on a regulated exchange, involves less credit risk than a forward contract.