Assume that Ricky Corporation (Ricky) normally sells goods in France and therefore has a stream of income which is denominated in euros. Ricky enters into a master agreement with a bank to convert this future stream of euros into U.S. dollars. Determine whether this agreement is considered a derivative under both the US GAAP and under the IFRS. Support your decision with reference(s) to the appropriate literature issued by both standard setters.

The Potato Company (Potato) produces frozen French fries and therefore uses potatoes as the major raw material in its manufacturing process. Potato enters a forward exchange contract to purchase 20 bushels of potatoes in 30 days for $1,200. The contract has a net settlement provision.

Part 1: Assume that the potatoes are worth $1,250 at the end of 30 days. Explain in detail how the forward exchange contract might or would be settled in 30 days? What are Potatos options with respect to the forward exchange contract?

Part 2: Assume that potatoes are not easily convertible into cash and that Potato has a history of taking delivery of the potatoes under these types of contracts (gross settlement). Potato has decided NOT to document the instrument as a normal purchase and sales contract. Prepare the journal entries required under both the US GAAP and IFRS separately, with detailed explanations of the basis for each dollar journal entry amount, and a detailed journal entry explanation with appropriate reference(s) to the accounting literature for both standard setters for each respective journal entry.

Part 1:

The Phone Company (Phone) issues call options for a premium of $100 on December 1, Year 1. The call options give the holder the right to buy 20 shares of Phone for $2,200 on December 31, Year 1. The contract may be settled, net (in cash or in shares) at the option of Phone. On December 31, Year 1, the shares are worth $2,500 and the options are exercised. Phone decides to settle gross and receives $2,200, delivering the 20 shares of Phone.

Instructions:

How would the above series of transactions be accounted for under the US GAAP and IFRS? Prepare the required journal entries for December 1 and December 31, Year 1, with detailed explanations of the basis for each dollar journal entry amount, and a detailed journal entry explanation with appropriate reference(s) to the accounting literature for both standard setters for each respective journal entry.

Part 2:

The Gas Company (TGC) recently issued a 10-year long-term note of $100 million, the proceeds of which are to be used for new gas exploration equipment. One of the borrowing requirements was that the interest rate on the note had to be variable at 4% over the London Interbank Borrowing Rate (LIBOR). Because TGC is subject to stringent rate-setting requirements by the Public Service Commission, TGC wants to fix its borrowing costs to a fixed rate of interest. Accordingly, TGC enters into an interest rate swap with a bank, whereby TGC will pay a fixed interest rate of 7% and receive a variable rate of interest that will be 4% over the LIBOR rate. The terms of the interest rate swap call for a notional payment of $100 million and the length of the swap, the settlement and the reset provisions on the interest payments and rates match those under the long-term note borrowing. There are no prepayment or option features.

Determine how TGC would determine whether the interest-rate swap meets the criteria for hedge accounting, and, more specifically, whether it qualifies under the short-cut method in assessing hedge ineffectiveness under the US GAAP and under IFRS.

Be very specific and detailed in your response, making references to any respective literature or pronouncements of both standard setters.

Is your answer with regards to the US GAAP affected at all by the recent FASB update in ASU2017-12? If not, explain why not; if yes, explain, specifically, how your answer differs from your original answer, including the effective date under the US GAAP for the change.