Recap:

Who is
right?
 CH 9.
Foreign Currency Transactions and
Hedging Foreign Exchange Risk
Recap: Handout 3-1 w/ Present Value Factor
1-1. Brandlin Company purchases materials from a foreign supplier on December 1, 2015, with payment of
18,000 korunas to be made on March 1, 2016. The materials are consumed immediately and recognized as cost
of goods sold at the date of purchase. On December 1, 2015, Brandlin enters into a forward contract to purchase
18,000 korunas on March 1, 2016. Relevant exchange rates for the koruna on various dates are as follows:

Forward
Spot Rate
Date Rate to March.1 J/E?
December 1, 2015 $2.80 $2.875
December 31, 2015 $2.90 $3.000
March 1, 2016 $3.05 N/A

Brandlins incremental borrowing rate is 12 percent. The present value factor for two months at an annual
interest rate of 12 percent (1 percent per month) is 0.9803. Brandlin must close its books and prepare
financial statements at December 31.
Cash Flow Hedging: Handout 3-2
Brandlin Company agrees to purchases materials from a foreign supplier on November 1, 2015. Materials are
shipped on December 1, 2015, with payment of 18,000 korunas to be made on March 1, 2016.

Because of concerns about movements in foreign exchange rates, on November 1, 2015, Brandlin enters into a
forward contract to purchase 18,000 korunas on March 1, 2016.

Forward
Spot Rate J/E?
Date Rate to March.1
November 1, 2015 $2.60 $2.700
December 1, 2015 $2.80 $2.875
December 31, 2015 $2.90 $3.000
March 1, 2016 $3.05 N/A
Hedge accounting?
Hedge accounting recognizes the offsetting effects on profit or loss of changes
in the fair values of the hedging instrument and the hedged item.

- Hedging instrument
Is a designated derivative whose fair value or cash flows are expected to offset changes
in the fair value or cash flows of a designated hedged item.

- Hedged item
Is an asset, liability, firm commitment, highly probable forecast transaction or net
investment in a foreign operation that (a) exposes the entity to risk of changes in fair
value or future cash flows and (b) is designated as being hedged.
Hedged item

Is an asset, liability, firm commitment, highly probable forecast transaction

or net investment in a foreign operation that (a) exposes the entity to risk of
changes in fair value or future cash flows and (b) is designated as being hedged.

- Firm commitment
Is a binding agreement for the exchange or a specified quantity of resources at a
specified price at a specific future date or dates.

- Forecast transaction
Is an uncommitted but anticipated future transaction.
Measurement of derivatives

If there is a designated hedging relationship between a hedging instrument

and hedged item, accounting for a gain or loss on the hedging instrument
and the hedged item shall follow hedging accounting.

- Assumptions
Conditions required for relationship to qualify as a hedging relationship have
been met; and Hedging relationship is effective.
Hedging relationships types

Fair value hedge

A hedge of the exposure to changes in fair value of a recognized asset or
liability or an unrecognized firm commitment that is attributable to a
particular risk and could affect profit or loss.

Cash flow hedge

A hedge of the exposure to variability in cash flows that (i) is attributable to a
particular risk associated with a recognized asset or liability or a highly
probable forecast transaction and (ii) could affect profit or loss.
Accounting fair value hedges

Hedged item
The gain or loss on the hedged item attributable to the hedged risk shall adjust the
carrying amount of the hedged item and be recognized in profit or loss.

Hedging Instrument
The gain or loss from remeasuring the hedging instrument at fair value shall be
recognized in profit or loss;
Accounting cash flow hedges

Hedged item
N/A;

Hedging Instrument
The portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge shall be recognized in other comprehensive income (OCI);

If a hedge of a forecast transaction subsequently results in the

recognition of a Financial asset or liability or Non-financial asset or liability
OCI gains or losses can be moved to profit or loss.