Oanda corporation Revision 5

Forex Hedge Accounting Treatment  

OANDA’s FXConsulting 

 

for Corporations

   

9 

 

the gain or loss on cash flow forex hedges will be recorded into the OCI account and the 

amount will be reclassified to earnings when the gain or loss on the hedged item impacts 

earnings.  Note, the determination and the tracking of when to release the OCI amount to 

earnings for purchase commitments may become quite complex as the hedged item’s impact to 

earnings may occur over an extended time, (for example, raw materials purchases that are used 

in a variety of finished products would impact earnings, only when the finished product has 

been sold to third parties). 

 

The change in foreign sales value, when converted to the reporting currency, will be offset by 

the cumulative change in value of the forex hedge, assuming that a hedging relationship is 

documented and proven. If the cash flow hedge is not documented or not effective (outside an 

effective range of 80% to 125%) then changes in the forex hedge's value will flow through 

earnings. Consult your auditor on acceptable hedging effectiveness ranges and methods for 

proving their success.  

 

  Fair value hedges manage translation and transaction risks.  

 

Fair value hedges are instruments that hedge the value of an asset or a liability recorded on the 

balance sheet, or the value of a firm commitment. Therefore, changes in the value of the forex 

hedge occur opposite on the balance sheet to changes in the value of the recorded 

asset/liability or firm commitment.  

 

A cash flow forex hedge has its gains and losses recorded in the OCI account and the amounts 

are subsequently reclassified to earnings when the hedged item impacts earnings, whereas, the 

gains and losses for a fair value forex hedge will be recorded in a manner that directly impacts 

the hedged item. For example, the hedged inventory purchase will have the inventory 

commitment recorded on the balance sheet prior to the receipt of the inventory. This inventory 

commitment value (change in fair market value of the firm commitment) will be reclassified 

directly to the inventory account, when the inventory is received. No additional tracking would 

be required to determine when the inventory eventually impacts earnings as part of cost of 

goods sold.  

 

(See the Firm Commitments example on page 11 to compare the balance sheets for a purchase 

commitment hedged with a cash flow hedge vs. a fair value hedge.) 

  Net investment hedges manage investment risks. 

A net investment hedge is designed to minimize the foreign exchange effect on foreign 

investment. In this case, a change in the value of the net foreign assets/liabilities is adjusted to 

the OCI foreign exchange translation account, which is offset by the change in value of the 

forex hedge. 

For designated forex hedges, the hedge contract must be with a third party supplier.  Typically, each 

designated forex hedge will be a separate contract.  However, there are some circumstances where a 

series of internal hedge transactions entered into between a parent company of a consolidated group 

and its subsidiaries will qualify as hedging instruments, if those internal hedges are offset to third-party 

hedging contracts (even if the third-party contract is completed on a net basis). 

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