Oanda corporation Revision 5

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OANDA Corporation 

Revision 1.5 

 

OANDA FX Consulting for Corporations 

Forex Hedge 

Accounting Treatment

 

Foreign Exchange Management  

Creating Cost and Revenue Certainty 

 

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Forex Hedge Accounting Treatment  

OANDA’s FXConsulting 

 

for Corporations

   

 

 

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Table of Contents 

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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