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Fair Value Hedge- Hedging

an Unrecognized Currency
Firm Commitment

Presented by Allyson L. Hernandez


On December 1, 20x4, Dominador Company contracts
to purchase special order goods from New York
Company. The contract meets the requirements of a
firm commitment-fair value hedge. Their manufacture
and delivery will take place in 90 days (on March 1,
20x5). The contract price is $1000 to be paid on March
1, 20x5. Thus, the transaction date and the settlement
date are both March 1, 20x5.
Also, on December 1, 20x4, Dominador Company
entered into the second forward contract in hedging
foreign currency payable commitment with a contract
to receive $1000 in 90 days at the forward rate of Php
40.15.
Journal entries to record the hedged item and
hedging instrument:
Hedged item (Unrecognized
Foreign Currency Firm Hedging Instrument Forward
Commitment) Contracts

December 1, 20x4 December 1, 20x4

No journal entry required to FC Receivable from XD


record the firm 40150
commitment. Pesos Payable to XD
40150
(P40.15 x $1000)
To record forward contract to
buy $1000 using forward rate.
Journal entries on the balance sheet date:
Hedged item (Unrecognized
Foreign Currency Firm Hedging Instrument Forward
Commitment) Contracts

December 31, 20x4


FC Transaction Loss FC Receivable from XD
250 250
Firm Commitment FC Transaction Gain
250 250
(P40.40 P40.15) x $1000 (P40.40 P40.15) x $1000

To record a loss on firm To record a gain on foreign


commitment using the change currency to be received from
in forward rate. the FC dealer.
Journal entries on the balance sheet date:
Balance Sheet Presentation on 12/31/20x4
Assets Liability

FC Receivable from XD Firm commitment P 250


40400
Less: Pesos Payable to XD
(40150)
Forward Contract (FV) P
250 _
Journal entries on the transaction and
settlement date:
Hedged item (Unrecognized
Foreign Currency Firm Hedging Instrument Forward
Commitment) Contracts

March 1, 20x5
Firm Commitment 200 FC Transaction Loss
FC Transaction Gain 200
200 FC Receivable from XD
200
To record gain on fair value of
firm commitment. To record a loss on foreign
currency to be received from the
exchange dealer.
Cash Flow Hedge- Hedge
of a Forecasted Transaction
On December 1, 20x4, Dominador Company expects to
purchase a machine for $1000 in United States on March
1, 20x5.The transaction is probable but there is no
binding agreement for this purchase and is to be
denominated in dollars. Thus, transaction and settlement
for the purchase of the machine is March 1, 20x5.

On December 1, 20x4, Dominador Company entered into


the third forward contract to purchase $1000 on March 1,
20x5 for P40.15. Dominador Company designates the
forward contract as a hedging instrument in a cash flow
hedge of the exposure to increase in the dollar rate.
Journal entries to record the hedged item and
hedging instrument:
Hedged item Forecasted
Transaction Hedging Instrument Forward
Contracts

December 1, 20x4

No journal entry required to FC Receivable from XD


record the forecasted 40150
transaction. Pesos Payable to XD
40150
(P40.15 x $1000)
To record forward contract to
buy $1000 using forward rate.
Journal entries on the balance sheet date:
Hedged item Forecasted
Transaction Hedging Instrument Forward
Contracts

December 31, 20x4

No journal entry required FC Receivable from XD


since it is only a forecasted 250
transaction. OCI Exchange Gain
250
(P40.40 P40.15) x $1000

To record a gain on foreign


currency to be received from
the FC dealer.
Journal entries on the balance sheet date:
Balance Sheet Presentation on 12/31/20x4
Assets

FC Receivable from XD P 40400


Less: Pesos Payable to XD (40150)
Forward Contract (FV) P 250 _
Not a Hedge Accounting -
Speculation
Dominador Company entered into the third
forward contract for speculative purposes in
anticipation for a gain, and enters into a
contract on December 1, 20x4 to acquire US
$1000 ( a currency in which the company has
no receivables, payables, commitments or
forecasted transactions) on March 1, 20x5.