Question

Reporting and Analyzing Derivatives
Assume Johnson & Johnson reports the following schedule of other comprehensive income in its 2011 10-K report ($ millions):

($ in millions)	Foreign currency translation		Gains/(Losses) on Securities		Employee Benefit Plans		Gains/(Losses) on Derivatives & Hedges		Total Accumulated Other Comprehensive Income/(Loss)
January 3, 2010	$(409)		$(10)		(1,335)		$125		$(1,629)
2010 changes
Unrealized gain (loss)	--		89		--		(250)
Net amount reclassed to net earnings	--		(45)		--		188
Net 2010 changes	(232)		44		(21)		(62)		(271)
January 2, 2011	$(641)		$34		$(1,356)		$63		$(1,900)

b. How does Johnson & Johnson report its derivatives as cash-flow hedges on its balance sheet?

Cash-flow hedges are reported at Answerfair valuecost on the balance sheet.

Changes in value are recognized on the Answerbalance sheet in AOCIincome statement as earningsnot applicable

c. By what amount have the unrealized gains/losses on the cash flow hedges affected current income?

Current income AnswerincreaseddecreasedN/A by $Answer million.

d. What does the $188 million classified as "Net amount reclassed to net earnings" relate to? How has this affected Johnson & Johnson's profit?

a) The unrealized gain has been reclassified from AOCI and recognized in current earnings relating to derivatives for which the underlying transaction concluded in the current year. This increase in AOCI is offset by a decrease in net income (and in retained earnings).

b) The unrealized loss has been reclassified from AOCI and recognized in current earnings relating to derivatives for which the underlying transaction concluded in the current year. This increase in AOCI is offset by a decrease in net income (and in retained earnings).

c) The unrealized gain has been reclassified from AOCI and recognized in current earnings relating to derivatives for which the underlying transaction concluded in the current year. This increase in AOCI is offset by an increase in net income (and in retained earnings).

d) The unrealized loss has been reclassified from AOCI and recognized in current earnings relating to derivatives for which the underlying transaction concluded in the current year. This increase in AOCI is offset by an increase in net income (and in retained earnings).

Answer 1

b. If there is high probable forcast transaction, mostly Receipt/Payment of foreign Exchange having ecomonic relation between two entities with proper Documentation derivatives becomes Cash Flow Hedge

If any gain or loss are recognised in cash flow hedge its shows cash flow hedge reserve in OCI

c. If any gain or loss on hedging Instrument is More than Hedge item then Excess Gain or Loss transfer to current profit and loss

In this question hedge instrument amount is not given

d.As per IAS 109 the effective Portion of gains and loss on heding instrument in Cash Flow Hedge is reclassied i.e. when High Probable forcast transaction will not result in assets Then cash flow hedge reserve transfer to profit and loss

Other comprehensive Income will increse by that amount

And Below four Option

Option B is correct

Couse of loss transfer from OCI result into Increse in OCI balance and the another effect on Profit which will come Down.