Giant Manufacturing

Giant Manufacturing LLC (Giant) is a public entity that manufactures power

transmission belts and fluid power product.

Giant

owns a 100 percent

direct interest in subsidiaries Small Sub 1

and Small Sub 2.

Giant

has

U.S. dollar (USD) functional currenc

y.

Small Sub 1 and Small Sub 2 have e

uro

(EUR) functional currencies.

Organizational Chart

Case Facts

Because of

its consolidated interest in EUR

-denominated subsidiaries, Giant

is exposed

to the risk of adverse changes in the EUR

/USD exchange rate in its consolidated financial

statements. Changes in the EUR

/USD exchange rate affect the currency translation

account that

is recorded within other comprehensive income.

As part of it

s risk management program to hedge its exposure to the EUR

/USD exchange

rate, Giant

plans to use (1) a EUR

/USD c

ross

-currency s

wap (the "Cross

-Currency

Hedging Instrument") and (2) a Euro

-denominated note that

is issued and outstanding

with third parties and is not reported at fair value (the "EUR Debt

-Hedging Instrument")

to protect the value of designated monetary amounts of its net investments in EUR

functional currency subsidiaries (i.e., Small Sub 1 and Small Sub 2) against changes in

the EUR

/USD exchange rate.

Giant

entered into the receive floating rate (3

-month USD LIBOR

plus a fixed spread

)

pay floating rate (3-

month EUR EUR

IBOR

plus a fixed spread

) Cross

-Currency Hedging

Instrument on March 17, 2019. Between the hedge designation date and the maturity date

of the Cross

-Currency Hedging Instrument, Giant

is using the Cross

-Currency Hedging

Instrument to hedge the risk of changes in the USD equivalent value of a portion of its

Case

9: Giant Manuf

acturing

Page

2

Copyright

20

20 Deloitte Development LLC

All Rights Reserved.

net investment balance in Small Sub 1 attributable to changes in the EUR

/USD exchange

rate.

The EUR Debt

-Hedging Instrument is an outstanding note that

was issued by Giant

, has a

EUR 240 million notional amount, is due July 15, 2027, and pays interest at a rate of

5.75 percent

per annum. Between the hedge designation date and the maturity date of the

EUR Debt

-Hedging Instrument,

Giant

is using the EUR De

bt-Hedging Instrument to

hedge the previously unhedged risk of changes in the USD equivalent value of a portion

of its net investment balance in Small Sub 2 attributable to changes in the EUR

/USD

exchange rate.

See Handout 1 and Handout 2 for a summary of

Giant

's hedging documentation

considerations for the Cross

-Currency Hedging Instrument and EUR Debt

-Hedging

Instrument, respectively.

Giant

wants to apply hedge accounting to both hedging relationships.

The assessment of hedge effectiveness, if applicable, will be on a pretax basis.

On August 28, 2017, the FASB issued Accounting Standards Update No. 2017-

12,

Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for

Hedging Activities

(ASU 2017-

12). For public business entities, the amendments in ASU

2017-

12 are effective for fiscal years beginning after December 15, 2018, and interim

periods within those fiscal years. Early application is permitted in any interim period after

issuance of ASU 2017-

12. Giant has made this election.

Required:

1.

Define the type of hedging arrangement that Giant is attempting to use with the

Cross

-Currency Hedging Instrument and EUR Debt

-Hedging Instrument to hedge

against changes in foreign currency exposure. In other words, are these cash flow

hedges, fair value hedges, or net investment hedges?

2.

What documentation requirements must Giant meet for its hedges to qualify for hedge

accountin

g? Identify the appropriate

Codification reference to support your response.

3.

Does the hedging relationship associated with the Cross

-Currency Hedging

Instrument qualify for hedge accounting? Assume that Giant prepared its hedge

documentation at the incepti

on of the hedging relationship.

4.

Does the hedging relationship associated with the EUR Debt

-Hedging Instrument

qualify for hedge accounting? Assume that Giant prepared its hedge documentation at

the inception of the hedging relationship.