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Firm Commitment Accounting Scenario (Cash Flow vs. Fair Value Hedge)
The accounting treatment is better illustrated through the use of an example since the journal entries
can seem, at times, to be counterintuitive. For example, consider a fair value forex hedge of a firm
purchase commitment as compared to a cash flow forex hedge of a firm commitment of the same
foreign currency exposure.
Assumptions
Assume that a US company has two separate firm commitments to purchase SGD $1,150,000 of
finished products from one Singapore supplier in two months and to purchase an additional SGD
$1,150,000 of finished products from a different Singapore supplier in two months. The current
exchange rate for USD/SGD is 1.15.
The US company enters into two carry spot forex hedges to hedge out each of the purchase
commitments of the SGD $1,150,000 (two trades are completed that each short one million
USD/SGD). Each of the forex hedges sells $1,000,000 USD and buys $1,150,000 SGD. One carry
spot forex hedge is designated as a cash flow hedge and the other as a fair value hedge. We will assume
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