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Flashcards in Hedge Accounting Deck (14):

In cash flow hedge, the item being hedged is measure using?

PV of expected cash inflow and outflows


Where to record gain or loss for Fv hedge and cash flow hedge?

FV hedge: net income

CF hedge: OCI, the effective portion in OCI, ineffective portion go to current income.


What type of hedge is firm commitment and forecasted transactions?

Commitment: FV

Forecasted transactions: CF hedge


Foreign currency hedge can be used for?

Hedge risk from foreign currency rate changes from planed transactions

Foreign currency rate change for AFS securities ( speculate)

Rate related change in accounts receivables/ payables

Can be used as FV hedge ( firm commitment, AFS, and net investment in foreign operations) or CF hedge ( forecasted transactions), and hedge of recognized asset or liability can be either FV or CF hedge, depends on management's designation.


Cash flow hedge statement disclosure requirement

The effective portion recorded in OCI need to be disclosed

The ineffective portion reported in net income need to be disclosed

Specific Disclosure is required for both derivative issuers and holders


What is a call option and out option?

Call option is the holder has right to acquire an underlying at an exercise or stock price, anytime during the option.

Put option is holder has right to sell



The process of separating an embedded derivative from its host contract.


At the money
In the money
Out of money

When underlying (fair value of option) is =, >,


Embedded derivative

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


Forward contract

An agreement between two parties

To buy and sell

Specific Q or commodity, FC, or financial instrument ( known quantity)

At an agreed upon price ( known price)

Delivers at a designated future date. ( known date)


Futures contract

A forward based contract

Make or deliver (sell) of a designated financial instrument, FC, or commodity ( unknown quantity)

During a designated period. ( unknown date)

At a specific price or yield. ( known price)


IFRS hedging differ from GAAP

Has one or more underlying

Requires no or little initial investment

Permits net settlement

NO notional amount

Can hedge partial life of the hedged item
Allow hedge a forecasted business combination that is subject to FC risk.


IFRS (2 requirements) derecognizing a transfer of financial asset rule vs GAAP (3 requirements)

IFRS: must be transferred outside of the consolidated groups of transferor

The transferor must have transferred to substantially all the risk and reward of ownership of the financial asset

For GAAP, one more requirement - the contractual rights to the financial assets cash flows can't be retained by the transferor.


Can company hedge fair value of an investment using equity accounting?

No, specifically excluded as being eligible to be hedged for accounting purpose under GAAP.