- Write out potential journal entries (and the FS line item impacts - e.g. increases and...

- Write out potential journal entries (and the FS line item impacts - e.g. increases and decreases) for a fair value hedge (of an AFS security) and a cash flow hedge (e.g. accounts receivable).

a) what is the net impact to the income statement on both of these during the period the derivative is changing value - and with the cash flow hedge in the beginning and at settlement? what is the impact to total equity during these periods (pay particulary attention to the cash flow hedge and the effect OCI and income have on equity)? how are they different for fair value vs. cash flow?

b) what would be different in a) if you didn't qualify for hedge accounting?

c) what would be different in the fair value hedge if you were hedging against a trading security? Based on this answer, why might companies be less likely to use hedge "accounting" for a trading security?

Expert Solution

Potential Journal enteries 1.Loss on hedging instrument .effective portion .

Dr.OCI-cash flow hedge reserve..Cr.FP.financial liability from hedging instrument.

Loss on hedging instrument .ineffective portion

Dr.P/L ineffective portion of loss onhedging instrument.Cr.FP financial liabillity from hedging instrument.

OR

Gain on hedging instrument.effective portion Dr.FP.fianacial asset from hedging instrument. Cr.OCI.cash flow from hedge reserve.

Gain on hedging instrument .ineffective portionDr.FP.financial asset from hedging instrument.Cr.P/L.ineffective portion of gain on hedging instrument..

fair value hedgeis an arrangement to mitigaterisk of changes in fair value of recognised assets.or liability on an unrecognised firm commitment..fair value hedge depend on the changes in hedge instrument.recognised in other comprehensive income.if changes recgnisedin P/L fair value changes also recgnised in P/L.

Fair value hedge differ from a cash flow hedge in that the aim of fair value hedge as compensating fair value changesof an existing assetor liability.while cash flow hedge aim is to reduce or removethe variability of cash flow arising from recognised asset or liability.

Entries can only obtain the right to achieve hedge accounting if they meet as an offset to change in fair value or cash flow hedge.item is accounted for as trading or AFS security.

ekkarill92 answered 1 year ago

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