Hedges of Recognized Foreign Currency– Denominated Assets and Liabilities

• Published in: The CPA journal (1975) Vol. 89; no. 8; pp. 54 - 58
• Main Author: Rambo, Robert G
• Format: Journal Article
• Language: English
• Published: New York New York State Society of Certified Public Accountants 01-08-2019
• Subjects: Accounting Standards Updates; American dollar; Cash flow; Discount rates; Fair value; Foreign exchange rates; Liability
• ISSN: 0732-8435

The change in fair value of a foreign currency forward contract designated as a fair value hedge is recognized currently in earnings in the same line of the income statement as the foreign currency exchange gain or loss on the underlying asset or liability. Changes in the forward contract's fair value related to changes in the difference between forward and spot rates is recognized in earnings in the same line of the income statement as the foreign currency exchange gain or loss on the underlying asset or liability. On the same date, the American company entered into a forward contract to buy €1 00,000 in three months at €1=$1.0929. Because the forward contract completely eliminates the cash flow variability from exchange rate risk, the company can designate the forward contract as a cash flow hedge of the payable. The company can also designate the forward contract as a fair value hedge because it guarantees the fair value of the payable will be $109,290. Because the settlement date, currency type, and currency amount of the forward contract match the corresponding terms of the payable, the hedge is expected to be highly effective.