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Cash Flow Hedge

(1) The company entered into a forward contract on December 15, 2014 to hedge against future changes in the exchange rate when making a forecasted purchase on January 15, 2015. On December 31, 2014 and January 15, 2015, the value of the forward contract and accumulated other comprehensive income are adjusted to reflect changes in the fair value of the contract. On settlement, the company makes the purchase and receives a net cash settlement equal to the original forward rate. (2) The document also discusses hedging a forecasted sale with a forward contract. The sale amount and accounts receivable will be based on the spot rate on the transaction date. Gains or losses in other comprehensive income from the forward contract will be re

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64 views

Cash Flow Hedge

(1) The company entered into a forward contract on December 15, 2014 to hedge against future changes in the exchange rate when making a forecasted purchase on January 15, 2015. On December 31, 2014 and January 15, 2015, the value of the forward contract and accumulated other comprehensive income are adjusted to reflect changes in the fair value of the contract. On settlement, the company makes the purchase and receives a net cash settlement equal to the original forward rate. (2) The document also discusses hedging a forecasted sale with a forward contract. The sale amount and accounts receivable will be based on the spot rate on the transaction date. Gains or losses in other comprehensive income from the forward contract will be re

Uploaded by

MichBadilloCalanog
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Cash Flow Hedge

(1) Cash flow hedge of a forecasted purchase transaction


Dec 15, 2014 Dec 31, 2014 Jan 15, 2015
Spot rate 40 50 60
Forward rate 45 55 60

Hedged item Hedging instrument


Dec 15, 2014 No entry No entry
Dec 31, 2014 No entry Forward contract (asset) 10K
Accum OCI-Gain 10K
Jan 15, 2015 Inventory 60K Forward contract (asset) 5K
Cash 60K Accum OCI-Gain 5K
(change in FV)

Cash 15K
Forward contract (asset) 15K
(net settlement)
Notes *Inventory & cash payment are based *If forward rate increased, increase in
on the spot rate on the actual Accum OCI
transaction date *If forward rate decreased, decrease
*The gain in OCI will remain in OCI in Accum OCI
until it is sold. Once it is sold, there *On the actual transaction date, net
will be a reclassification of OCI to P/L cash settlement should be equal to the
as a reduction to CGS. (If there is a forward rate on Dec 15, 2014.
loss in OCI, then addition to CGS).

(2) Cash flow hedge of a forecasted sale transaction – present value


Hedged item Hedging instrument
Notes *AR is based on the spot rate on the *PV = 1 on settlement date
actual transaction date *If forward rate increased, decrease in
* Sales is based on the spot rate on Accum OCI
the actual transaction date, but it *If forwad rate decreased, increase in
should be adjusted to reflect the gain Accum OCI
or loss in reclassifying OCI to P/L
 If OCI-gain, addition to Sales
 If OCI-loss, reduction to Sales
 Net effect on sales: Sales will be
based on the spot rate on the
date it entered into a forward
contract

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