Hedge Accounting

Hedge accounting is not an automatic right; it must be earned. Once you have gathered your foreign currency exposure data, you then have to determine what forex hedge product will be used and whether the forex hedge will be designated for special accounting treatment. For our discussion, we will use a carry spot forex hedge; however, a forex forward contract could have been used as well. (In the two case studies at the end of this document, we detail the various accounting entries for a recorded foreign asset and a future firm commitment.)

To recap, the following hedges can be designated for special accounting treatment: A cash flow hedge may be designated for a highly probable forecasted transaction, a firm commitment (not recorded on the balance sheet), foreign currency cash flows of a recognized asset or liability, or a forecasted intercompany transaction. A fair value hedge may be designated for a firm commitment (not recorded) or foreign currency cash flows of a recognized asset or liability. A net investment hedge may be designated for the net investment in a foreign operation.

An economic forex hedge is not designated for special accounting treatment. The economic hedge would protect your economic position over time, but it may create earnings volatility. An economic forex hedge may be used to hedge any item; however, all the gains/losses on the hedge are immediately recorded into earnings.

Courtesy: OANDA’s FXConsulting for Corporations

Pip Booker
Chairman & Founder
Booker and Cropper Capital Group