Forex Hedge Accounting Treatment

highly probable forecast transaction (Transaction Risk – Cash ….. Note that a cash flow hedge forex foreign currency can be used to … . Chinese Yuan Renminbi FOREX

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Forex Hedge Accounting Treatment
Introduction … 3
Why Hedge? … 3
What Is Hedging?… 3
What Is Hedge Accounting? … 3
Who Is This Document Intended For? … 4
What Are the Steps to Hedge Accounting? … 4
Quick Background … 5
Types of Forex Hedges … 5
Types of Hedged Exposures … 5
Documentation and Accounting Overview … 5
Summary Table … 6
Obtaining Special Accounting Designation for Your Forex Hedges … 8
Designated Hedges – US GAAP and IFRS Considerations … 8
Types of Hedged Exposures … 10
Recorded Financial Asset or Liability (known or translation risk) … 10
Firm Commitments – Fair Value or Cash Flow Hedge …11
Firm Commitment Accounting Scenario (Cash Flow vs. Fair Value Hedge) …11
Highly Probable Forecasted Forex Transactions (Transaction Risk – Cash Flow Hedge) … 13
What Happens When a Highly Probable Foreign Transaction Ceases to be Highly Probable? … 14
Net Investment in Foreign Operation – Investment Risk … 14
Documenting Designated Hedging Criteria … 15
Accounting Standards … 15
Organizational Requirements … 15
Conclusion … 16
Other Issues … 17
Forex Options … 17
Accounting Ramifications for Forex Options … 17
Speculative Trading… 18
Additional Complexity… 18
Disclaimer … 19
Case Study #1- Economic Forex Hedge – Not Designated – Accounting Entries … 20
Case Study #2 – Cash Flow Hedge – Designated – Accounting Entries … 24
Appendix A – Concepts and Terms … 29
Accounting Currency Types … 29
Risks … 29
Types of Forex Hedges … 29
Foreign Currency Exposures … 30
Hedge Testing… 31
Appendix B – What to Hedge? … 32
Data Capture: The Key to Determining How Much to Hedge… 32
Capturing Data on Recorded Assets and Liabilities… 32
Capturing Data on Firm Commitments… 32
Capturing Data on Forecasted Transactions… 33
Forex Hedging Ratios … 33
Natural Hedges … 34
Appendix C – Forex Hedge Summary Table … 35

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