Accounting Standards
IAS 39 Requirements
IAS 39 requires that all hedge relationships be documented prior to commencing forex hedging (in
other words, before the hedge is first put in place). Such documentation must cover, among other
things, the following points:
How the hedge forms part of the entity's overall risk management policy.
Details of the hedged item, hedging instrument, and the specific amount of risk being hedged.
How the effectiveness of the hedge will be demonstrated, both prospectively and
retrospectively.
FAS 133 Requirements
FAS 133 requires that all hedge relationships be documented in advance and cover the following:
Identification of the forex hedge and the hedged item (for example, ―Forex spot trade [sell or
buy] and the related sales contract‖).
The risk you are hedging (for example, changes in the foreign currency value).
The accounting treatment you are applying (cash flow or fair value).
The objective of the hedge (for example, to remove the volatility of future earnings related to
changes in foreign currency exchange rates).
How you are going to evaluate whether you have effectively hedged that risk (for example,
using the dollar offset method comparing the change in the forex hedge vs. the change in the
value of the future financial asset or liability).
An assessment of the counterparty risk for the hedge provider.
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