Oanda corporation Revision 5
Yüklə 0,77 Mb. Pdf görüntüsü
|
- Bu səhifədəki naviqasiya:
- Transactions at 30 Days
- Transactions at 60 Days
- Purchase Product from Singapore for Cash
- Terminate Carry Spot Contract
- Reclassify Purchase
- Forex Hedge Accounting Treatment OANDA’s FXConsulting for Corporations
- Reclassify OCI account
- Highly Probable Forecasted Forex Transactions (Transaction Risk – Cash Flow Hedge)
- What Happens When a Highly Probable Foreign Transaction Ceases to be Highly Probable
- Current Assessment of the Transaction’s Probability of Occurring Impact on Hedge
- Reasonably Possible Stop
- Not Reasonably Possible Stop Not Probable Stop Reclassify
- Net Investment in Foreign Operation – Investment Risk
|
Recorded Entries
The following entries would be recorded in USD:
FAIR VALUE HEDGE
Debit (credit) Account Debit (credit) Transactions at 30 Days
Forex Hedge FMV Carry spot contract 45,454.54
Carry spot contract 45,454.54
OCI – Other comprehensive income (45,454.54)
Gain on Carry Spot Contract (P&L) (45,454.54)
Loss on purchase commitment (P&L) 45,454.54
Purchase commitment (45,454.54)
Forex Hedge FMV Increase Carry spot contract 49,783.55
Carry spot contract 49,783.55 OCI – Other comprehensive income (49,783.55)
Gain on Carry Spot Contract (P&L) (49,783.55)
Loss on purchase commitment (P&L) 49,783.55
Purchase commitment (49,783.55)
Inventory ($1,150,000 SGD / 1.050 = $1,095,238.09 USD) 1,095,238.09
Inventory ($1,150,000 SGD / 1.050 = $1,095,238.09 USD) 1,095,238.09 Cash
(1,095,238.09)
Cash (1,095,238.09) Terminate Carry Spot Contract Cash
95,238.09 Cash
95,238.09 Carry spot contract (95,238.09)
Carry spot contract (95,238.09) Reclassify Purchase n/a
Purchase Commitment 95,238.09
Inventory (95,238.09)
Forex Hedge Accounting Treatment OANDA’s FXConsulting for Corporations 13
Debit (credit) Account Debit (credit) Commitment Transactions at 70 Days
Sales to US Customers Cash
1,300,000.00
Cash 1,300,000.00 Sales
(1,300,000.00)
Sales (1,300,000.00)
Cost of goods sold 1,095,238.09
Cost of goods sold 1,000,000.00
Inventory 1,095,238.09
Inventory (1,000,000.00) Reclassify OCI account OCI
95,238.09
n/a Cost of goods sold (95,238.09)
Pros
The gain or loss on the forex hedge impacts earnings at the same time the hedged item impacts earnings. The gain or loss on the designated purchase commitment is not recorded on the balance sheet. The reclassification of the gain or loss in the OCI account on the designated sales commitments is relatively easy to track and record (as compared to purchase commitments.)
The gain or loss on the forex hedge impacts earnings at the same time the hedged item impacts earnings. Tracking the impact to earnings on purchases is relatively simple because the underlying purchase amount is adjusted and the impact to earnings naturally flows to earnings over time. This process will be substantially easier to manage fixed asset, inventory, or raw material purchases. Cons
Tracking the impact to earnings on purchases may become quite complex because it may occur over time.
Gain or loss on the designated purchase commitment is recorded on the balance sheet. (This is typically not a recorded asset or liability.) Conclusion As shown in the above scenario, the two different hedge designations have the same impact to earnings at the same time; however, the recorded journal entries are different. Under the fair value hedge, the change in the value of the forex hedge is offset by recording the change in value of the purchase commitment on the balance sheet. While commitments nor there change in value are not typically recorded on the balance sheet, the desire to record the fair value of hedges on the balance sheet requires this unique treatment of recording the change in the value of the commitment on the balance sheet. The above scenario is fairly simple, but the benefit of using fair value hedges for firm commitments is easier to see when you consider raw material purchases in a foreign currency. Tracking the earnings impact timing of raw material purchases is much more complex under a cash flow hedge, especially when taking into account complicating factors such as raw materials used in multiple products or sold to intercompany subsidiaries. With such complicating factors, the OCI amounts for cash flow hedges would become very complex to track and reclassify to earnings. On the other hand, a fair value hedge would adjust the raw material inventory directly, thereby reducing the need for future tracking to earnings.
A cash flow hedge is used for highly probable future financial assets or liabilities (for example, a highly probable sales/purchase contract). The effective portion of the hedge's change in the fair value can be recorded in the equity section of the balance sheet under ―OCI – Foreign Exchange Account‖, provided some strict criteria are met. The cumulative hedge value recorded as OCI will be subsequently reclassified into earnings when the forecasted transaction affects earnings. As an example, consider a sales contract that drops in value by $10,000 due to a change in exchange rates from the date the cash flow forex hedge commenced to the date the product was delivered. The sale is recorded in the income statement when the product is delivered. The reduced sales value is offset by the reclassification of the $10,000 gain on the forex hedge (assuming an effective hedge) that had been recorded as OCI. The second case study at the end
Forex Hedge Accounting Treatment OANDA’s FXConsulting for Corporations 14
of this paper provides sample accounting entries related to cash flow hedges and the related future financial asset. The reclassification into earnings of the OCI amounts may be fairly complex if the hedged item impacts earnings over a longer time frame. For example, a hedged intercompany product sale to a subsidiary will not have the OCI reclassified into earnings at the time of the intercompany sale. Instead, it will be reclassified into earnings when the subsidiary completes the product sale to third parties. For another example, the hedged foreign currency purchase of raw materials used for producing a finished product would not have the OCI amounts reclassified into earnings until the finished product is sold.
Consider the situation where a cash flow forex hedge was designated for a highly probable forecasted foreign currency purchase that later ceases to be highly probable (due to a regular review—at a minimum, at each reporting date—of the probability designation). From the time the hedge was designated, the OCI account has accumulated amounts.
The table below provides guidance on what to do when an assessment determines a change in the probability of the transaction occurring.
Current Assessment of the Transaction’s Probability of Occurring Impact on Hedge Accounting Impact on the OCI Account Amounts Highly Probable Continue Continue to accumulate amounts in the OCI account.
Previous OCI Amounts remain in the OCI account and will be reclassified to income when the transaction impacts earnings. Stop accumulating new OCI amounts. Current gains/losses on the forex hedge are recorded directly to earnings.
Reclassify previous OCI Amounts in the OCI account to earnings. Current gains/losses on the forex hedge are recorded directly to earnings.
When hedging the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in OCI (outside earnings) as part of the cumulative translation adjustment account. Similar to a cash flow hedge, you must document the hedging relationship in advance and prove the effectiveness of the hedging relationship on both a prospective and retrospective basis.
For details on the precise financial statement and financial statement note disclosure, refer to your Yüklə 0,77 Mb. Dostları ilə paylaş:
|