Special Hedge - Forex

Before a company can designate a forex hedge as one that qualifies for the special hedge accounting, specific criteria must be met and documented. While each forex accounting hedge (cash flow, fair value, or investment) has unique accounting treatment, the guiding principle is the recognition of the gain/loss of the hedged items and the gain/loss of the forex hedge into earnings at the same time. That is, the effective portion of the forex hedge’s gain/loss is recognized simultaneously on the income

statement as the gains/losses from the hedged foreign currency item. The ineffective portion of a forex hedge’s change in value (for example, over-hedged amounts or interest carrying costs) must be recognized immediately in earnings. Similarly, any forex hedge that does not meet the criteria for designation or is not designated as a cash flow, fair value, or net investment hedge has its change in fair market value recognized immediately in earnings. Proper documentation is critical to achieving hedge accounting treatment and must be supplied up front before a hedge is initiated. Further, prospective and retrospective assessments of a forex hedge must take place over its lifetime to ensure the hedge is effective. As noted previously, any ineffective portion of a forex hedge is recorded directly to the income statement. The right to perform special hedge accounting for designated forex hedges must be

Courtesy: OANDA’s FXConsulting for Corporations

Pip Booker
Chairman & Founder
Booker and Cropper Capital Group