Question
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
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.
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