Oanda corporation Revision 5

Recorded Financial Asset or Liability (known or translation risk) 

Not designated for special accounting treatment 

Since most recorded financial assets and liabilities are revalued at each reporting date, an undesignated 

economic forex hedge is an efficient mechanism for managing this foreign currency exposure. If the 

item to be hedged relates to a recorded financial asset or financial liabilities (for example, accounts 

receivable or accounts payable), then the change in the fair value of the hedge will be recorded as a 

foreign exchange gain/loss on the income statement. The resulting change in the financial asset/liability 

will also be recorded as a foreign exchange gain/loss on the income statement. There is no need for 

special hedge accounting since the gains and losses on the hedge and the hedged item will offset each 

other on the income statement.  

The benefits of not designating the hedge for special accounting treatment include no upfront 

documentation, no required ongoing testing (although hedge effectiveness testing is a prudent 

measure), and the foreign exchange position may be managed on a net basis (lowering the hedge 

transaction costs).  Disadvantages may occur when the hedged item impacts earnings differently from 

when the forex hedge impacts earnings.  For example, available-for-sale financial assets will have their 

changes in carrying amounts recorded in equity, which would create a mismatch in earnings timing, if 

the forex hedge was not designated.    

Based on how well the hedged item and the forex hedge are effectively matched, the changes in 

carrying value would offset each other. The net amount on the income statement, therefore, represents 

the inefficiency of the hedging relationship or the portion of the asset/liability that was not hedged. In 

the latter part of this document, the first case study documents the accounting entries related to an 

economic forex hedge and the related financial asset when no designation has occurred.