Forex Hedge Accounting Treatment
OANDA’s FXConsulting
for Corporations
8
Obtaining Special Accounting Designation for Your Forex Hedges
Hedge accounting is not an automatic right; it must be earned.
Once you have gathered your foreign currency exposure data, you then have to determine what forex
hedge product will be used and whether the forex hedge will be designated for special accounting
treatment. For our discussion, we will use a carry spot forex hedge; however, a forex forward contract
could have been used as well. (In the two case studies at the end of this document, we detail the various
accounting entries for a recorded foreign asset and a future firm commitment.)
To recap, the following hedges can be designated for special accounting treatment:
A
cash flow hedge may be designated for a highly probable forecasted transaction,
a firm
commitment (not recorded on the balance sheet), foreign currency cash flows of a recognized
asset or liability, or a forecasted intercompany transaction.
A fair value hedge may be designated for a firm commitment (not recorded) or foreign
currency cash flows of a recognized asset or liability.
A net investment hedge may be designated for the net investment in a foreign operation.
An economic forex hedge is not designated for special accounting treatment. The economic hedge
would protect your economic position over time, but it may create earnings volatility. An economic
forex hedge may be used to hedge any item; however, all the gains/losses on the hedge are immediately
recorded into earnings.
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