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Forex Hedge Accounting


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Forex Hedge Accounting

  1. 1. FOREX HEDGE ACCOUNTING Creating Cost & Revenue Certainty<br />
  2. 2. What is Hedging???<br />
  3. 3. Basic Concept<br />The forex hedge’s change in value is opposite to the change in value of the foreign currency exposure (hedged item).<br />These two amounts offset each other to obtain cost certainty or revenue certainty.<br />
  4. 4. Types of FOREX Hedges<br />Designated for accounting purpose:<br />Cash flow hedges.<br />Fair value hedges.<br />Net investment hedges.<br />Economic hedges are transactions that hedges the value of:<br />A foreign currency asset or liability.<br />The value of firm commitment.<br />The value of a forecasted transaction.<br />Hedges that are not designated:<br />Hedge is not properly documented or effective.<br />Its value must be recorded directly to the income statement.<br />
  5. 5. Types of hedged exposures and the applicable forex hedges <br />
  6. 6. Hedge Accounting<br />Hedge accounting is a privilege, not a right. <br />It is special accounting treatment for designated hedges that meet the required criteria outlined in the accounting standards. <br />
  7. 7. Some of the key standards related to forex hedge accounting include: <br />International Accounting Standard 39 (IAS 39)<br />Financial Accounting Standard 133 (FAS 133)<br />
  8. 8. IAS 39 Requirements <br />IAS 39 requires that all hedge relationships be documented prior to commencing forex hedging.<br />
  9. 9. FAS 133 Requirements <br />FAS 133 requires that all hedge relationships be documented in advance and cover the following: <br />Identification of the forex hedge and the hedged item <br />The risk you are hedging <br />For example, changes in the foreign currency value <br />The accounting treatment you are applying <br />For example, to remove the volatility of future earnings related to changes in foreign currency exchange rates <br />The objective of the hedge <br />An assessment of the counterparty risk for the hedge provider. <br />
  10. 10. Steps of Hedge Accounting<br />
  11. 11.
  12. 12. Causes of Hedge Ineffectiveness<br />When the hedged item and hedging instrument:<br />Are in different currencies.<br />Have different maturities.<br />Use different underlying interest or equity indices.<br />Use commodity prices in different markets.<br />Are subject to different counter party risk.<br />
  13. 13. THANK YOU<br />