Does anyone have a good memory trick for remembering the different ways to account for the different derivative types (e.g. hedging, speculating, etc)
there is only one way for accounting for all derivatives. They show up on the Balance sheet at Fair Market Value. Once it comes to the types of uses: FV Hedge => Any realized / Unrealized gains / losses on Income Statement Cash flow hedge => Unrealized portion -> Direct to Equity, Realized gains / losses - to Income statement. Net investment hedge in a foreign sub -> Unrealized -> Direct to Equity.
damn cp… seriously how do you know everything?? Do you have a weakness at all?
So no acronyms or other memory tricks to remember those three?
@cpk: so CF hedge and foreign sub hedges are identical then? this doesn’t sound right to me just off the top of my head. I was under the impression that all three were accounted for differently, which would imply that the foreign sub hedge should also have realized gain/loss go directly into equity (although just thinking about it this makes no sense). Will check tomorrow though as this is important IMO.
Only thing I ever came up with, and it’s terrible was: A “spec” is a small thing and not “fair” to be judged on. -->Since anything speculative gets the full gammet, Fair Value does too. The other two don’t. It sucks. I know.
Here it is straight from FASB: “For a derivative designated as hedging the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income (outside earnings) as part of the cumulative translation adjustment. The accounting for a fair value hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of an unrecognized firm commitment or an available-for-sale security. Similarly, the accounting for a cash flow hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of a foreign-currency-denominated forecasted transaction.” If you ask me the accounting for foreign sub hedges is a pain in the a$$!!! You have to keep track of the type of commitment that you are hedging and then apply one of the first two methods. I’ll stick with remembering that FV hedges go entirely into IS and CF hedges are split with only realized gains/losses going into IS and unrealized gains/losses going into Equity.
that is exactly what I wrote, isn’t it… just confirming.
@CPK: pretty much, except for on foreign sub hedges where it talks about accounting for some using the FV hedge method and for others using the CF hedge method. But you were completely right on the way to acct for FV and CF hedges. To be honest I am still not entirely positive on how the foreign sub hedge would work/be accounted for (and probably wont until I see a decent example).
Okay sorry to drag this up all, but I am still confused about this crap, particularly after happening upon this Qbank question: IF the effectiveness criterion of a CF hedge and a net investment hedge of a foreign sub are not met, where are the gains and losses from the ineffective portions recognized? The answer states that the for both the ineffective portion is recognized in NI. Can someone elaborate on this? I was under the impression that for FV hedges the ineffective portion goes into NI (since all gains/losses whether realized or unrealized flowed into the IS; if this is the case though the net effect is to recognize the ineffective portion of the FV hedge in NI). So does this mean that the ineffective portion of all three types of hedges goes into NI? Please help? WTF am I missing here? Am I not correctly grasping effective and ineffective definitions? Why the hell is this sh!t such a pain in the a$$? I swear more than half a page in the CFAI texts needs to be devoted to this, with legitimate examples of each type of hedge!!
Anyone?
Pg 224 - Schweser FV Hedge - Gains/losses on Income statement Cash Flow Hedge - Gains / Losses in equity. Once anticipated transaction affects Income - flows thro’ the Income statement. Net Investment hedge for a Foreign Subsidiary - Gains / Losses along with translation effects - are in Equity. Additionally there a statement - which should probably be in BOLD/ITALICS/UNDERLINED. For all the 3 types of Hedges - any portion of the hedge that is NOT EFFECTIVE is realized on the Income Statement. GOOD TO KNOW!
Thanks CP thats what I had down, but was having a hard time merging the first three statements with the idea of effective/ineffective portion of a hedge. Its a bit difficult to understand what the effective/ineffective portion of the CF and foreign hedges are without examples.