Hedged Exposures
Economic Forex
Hedge*
Fair Value
Hedge
Cash Flow
Hedge
Net Investment
Hedge
Recorded asset or
liability
Yes - Common
Yes
Yes
n/a
Firm commitment
*
Yes – purchase
or sale
Yes - purchase
or sale
n/a
Forecasted highly
probable transaction
*
n/a
Yes
n/a
Net investment in
foreign operations
*
n/a
n/a
Yes
*An economic forex hedge may be used in any scenario; however, it will not necessarily achieve the
desired accounting treatment and it may, in fact, create volatility in earnings.
Documentation and Accounting Overview
Before a company can designate a forex hedge as one that qualifies for the special hedge accounting,
specific criteria must be met and documented. While each forex accounting hedge (cash flow, fair
value, or investment) has unique accounting treatment, the guiding principle is the recognition of the
gain/loss of the hedged items and the gain/loss of the forex hedge into earnings at the same time. That
is, the effective portion of the forex hedge’s gain/loss is recognized simultaneously on the income
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