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I have another assignment that I hope you can help me with. Here are the details:

In a Microsoft Word document, compare and contrast the differences between cash flow hedge accounting and fair value hedge accounting in Smith & Kohlbeck (2008).

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ISSUES IN ACCOUNTING EDUCATION Vol. 23, No. 1 February 2008 pp. 103-117 Accounting for Derivatives and Hedging Activities: Comparison of Cash Flow versus Fair Value Hedge Accounting Pamela A. Smith and Mark J. Kohlbeck ABSTRACT: Wareld Company is considering hedging the risk associated with (1) an available-for-sale (AFS) security portfolio and (2) an anticipated purchase of oil. Wareld's Board of Directors has limited experience in this area and has requested that you summarize the accounting and reporting implications if these items are hedged. The hedged risk in these two transactions can be either the risk associated with the cash ow or the risk associated with changes in the fair value. The two risks are discussed in separate parts of the case. In Part A, you will complete the accounting entries required for both cash ow and fair value hedges of the AFS security portfolio and summarize the nancial statement impact to help you understand the mechanics and implications of hedge accounting. In Part B, you will complete the accounting entries required for both cash ow and fair value hedges, based on the structure of the transaction to purchase the oil, and summarize the nancial statement impact of the accounting entries. You will then use the summary to draft a memo to the Board in which you articulate your understanding of the transaction structures, hedge accounting treatment, the nancial statement impact, and documentation requirements for hedge accounting. CASE INSTRUCTIONS ou have recently been employed by Wareld Company (the Company) and were approached by Mr. Clinton, the corporate treasurer, to assist in a project to help the Board of Directors understand the accounting and reporting implications of hedge accounting. Clinton is currently evaluating how to designate a put option that was purchased as a hedge of an available-for-sale (AFS) security portfolio. Clinton is also evaluating a hedge of an anticipated purchase of oil. He is evaluating the cash ow and fair value risks associated with each item. Mr. Young, the Chairman of the Board, has read about the potential devastating effects of derivatives and is wary about the proposed use of derivatives to hedge these items. Therefore, the Board wants an analysis of the proposed hedge structures' impact on the Y Pamela A. Smith is a Professor at Northern Illinois University and Mark J. Kohlbeck is an Assistant Professor at Florida Atlantic University. Professor Smith is indebted to numerous graduate and undergraduate students enrolled in classes at Northern Illinois University for their contributions to the development of this instructional case. We are indebted to Terry Wareld for helpful insights on earlier drafts and class-testing this case. We also thank Sue Ravenscroft (editor) and two anonymous reviewers for their helpful comments. The fact patterns in this case are based on actual corporate hedging scenarios. The names of the companies and individuals are ctitious. The fact patterns have been modied and simplied for instructional purposes. See the Teaching Notes for access to classroom ready tables. These tables are also available from the authors upon request. 103 104 Smith and Kohlbeck nancial statements to help its members understand the nancial reporting implications of hedging. Mr. Clinton has provided you with the facts for each hedge item. Part A provides the information about hedging the AFS security portfolio, and Part B provides the information related to the anticipated purchase of oil. Read the facts for each part and complete the tasks requested by Mr. Clinton. When completing these tasks, please ignore tax effects. Part A: Hedge the Cash Flow versus Fair Value of Available-for-Sale Security Portfolio On October 31, Wareld Company purchased 100,000 shares of Smith Company stock for $40 a share and classied the purchase as an AFS security according to Statement of Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115, FASB 1993). On November 30, the market price of Smith was $45 a share. On this date, the SFAS No. 115 adjustment to fair market value was recorded. Mr. Clinton believes that the market value of Smith has peaked. He has identied risks associated with the ultimate cash ow and the fair value of the AFS security portfolio and wants to hedge one of these risks. Therefore, the Company purchased a 60-day at-themoney put option for $3 a share to hedge the AFS security on November 30. The put option gives Wareld the right to sell Smith at $45 a share. Because the intrinsic value is zero upon its purchase (the put option is at-the-money), the $3 price represents the time value of the put option. The time value relates to the time to maturity and the likelihood that option will end up being in-the-money. Mr. Clinton must designate and document which risk is being hedged. He is considering two alternative risks to hedge and has asked you to complete the accounting and summarize the reporting implications related to each of the following hedge designations for this hedging instrument. Hedged Item: Cash Flows from AFS Security Portfolio Assume Mr. Clinton is interested in hedging the future cash ows generated from the AFS security portfolio because the cash ows will be used to satisfy a bond sinking fund requirement due on January 31. Therefore, the ultimate cash ows from this securities portfolio are designated as the hedged item. The put option gives Wareld the right to sell Smith at $45 a share, allowing Wareld to lock in the future cash ows from this portfolio. Hedged Item: Fair Value of AFS Security Portfolio Assume Mr. Clinton is interested in hedging the fair value of this AFS security portfolio. The fair value of the portfolio is designated as the hedged item because Wareld has to maintain certain asset levels to maintain a current ratio required by a lender. The put option will help accomplish the fair value hedge because the intrinsic value of the put option plus the spot price of the stock equals $45 a share. Therefore, with the put option, Wareld can lock in a minimum $4.5 million fair value of this portfolio. Required (1) Using Table 1, complete the journal entries for the AFS securities and the put option, assuming the designated hedge item is the ultimate cash ow from the portfolio.1 The 1 Monthly adjustments are required for the hedge transactions because Wareld closes its books each month. Further, the declining time value of the put option at December 31 is a function of the variability of the stock share price and reduction in the days to maturity. Issues in Accounting Education, February 2008 Accounting for Derivatives and Hedging Activities 105 boxes in the Tables indicate that an answer is expected. If no entry is necessary, indicate with ''none.'' (2) Using Table 2, complete the journal entries for the AFS securities and the put option, assuming the designated hedge item is the fair value of the portfolio. (3) Using Table 3, complete the summary of the nancial statement impact for the cash ow and fair value hedge. Compare the impact of the two hedging scenarios and be prepared to discuss the following: How does the nancial statement impact differ between the two hedges of the AFS security portfolio? How is the cash ow ''hedged?'' How is the fair value ''hedged?'' How does the accounting under SFAS No. 133 (FASB 1998) differ from the accounting under SFAS No. 115 once the AFS securities are designated as the hedged item? Part B: Hedge of Anticipated Purchase of Oil On October 31, Wareld Company is anticipating the purchase of 100,000 barrels of oil on January 31st of next year. The oil will be resold on March 31 at the spot price. However, recent turmoil in the world's oil-producing regions has negatively affected the supply of oil. These conditions are expected to continue into the foreseeable future. Mr. Clinton, the corporate treasurer, asked you to assist in the analysis of structuring the anticipated oil purchase transaction and the use of a futures contract to hedge this transaction. The Company can structure the transaction with the counterparty as either a forecasted transaction or a rm commitment. In anticipation of this transaction, the treasurer has determined that Wareld will purchase a futures contract at $39 per barrel (bbl) for 100,000 bbls with a maturity of January 31.2 The critical terms of the futures contract will match the anticipated transaction so the hedge is 100 percent effective. The futures contract is at market rates, and the company maintains a margin account with the broker; therefore, no cash will be exchanged at the inception of the contract. The futures contract settles in cash for the difference between the price stated on the contract and the spot price on January 31 (maturity). If the oil purchase is structured as a forecasted transaction, then Wareld will enter a futures contract for the right to buy oil on January 31 at $39/bbl. In a forecasted transaction, the price of oil is uncertain because the price will depend on the spot rate for oil on January 31 (this is referred to as a oating price). However, the futures contract provides a specic price ($39) for the oil on January 31 (this is referred to as a xed price). Hedging the forecasted transaction with a futures contract converts uncertain future cash ows into xed future cash ows by locking in the future cash ows related to this transaction. Therefore, this hedge converts a oating exposure into a xed amount (oating to xed). Under this scenario, cumulative gains or losses on the futures contract (assumed to be a 100 percent effective hedge) will offset the cumulative changes in forecasted cash ows of the purchase of oil. If the oil purchase is structured as a rm commitment for 100,000 bbls to be delivered on January 31 at a price of $39/bbl, then Wareld will enter a futures contract for the right 2 The hedge structure is set by the Treasury Department. You are not responsible for determining what derivative to use, whether to buy or sell the derivative, or when to enact the hedge terms. The hedge structure created in this case is purposefully simplied (assumes no time value, no processing cost, etc.) so that the impact of the hedge accounting is clear. Issues in Accounting Education, February 2008 106 Smith and Kohlbeck to sell the oil on January 31 at $39/bbl. In a rm commitment, the price of oil is a specic price without regard to what happens in the market (a xed price). The futures contract in this scenario is a commitment to sell the oil for $39. However, in order to settle the futures contract, the oil will be purchased at the spot rate on January 31 (an unknown or oating price). Hedging the rm commitment with the sale of a futures contract converts a xed rm commitment into an uncertain future value (xed to oating). Since the hedge is assumed to be 100 percent effective, cumulative gains or losses on the futures contract will offset the cumulative changes in the fair value of the rm commitment. The Board of Directors is concerned about the robustness of either hedge structure because of the uncertainty of oil prices increasing or decreasing during the hedge period. Therefore, Mr. Clinton created two pricing scenarios (price-increasing and price-decreasing) and asked you to complete the accounting entries and a summary of the nancial statement impact for both pricing scenarios. Analysis of the hedge accounting under these different pricing assumptions will help evaluate the robustness of the hedge. Required (1) Price-Increasing Assuming a price-increasing scenario, use Tables 4, 5, and 8 to complete the following (clearly label each account, i.e., futures, rm commitment, Gain/LossIncome Statement (IS), Gain/LossOther Comprehensive Income (OCI)). The boxes in the Tables indicate that an answer is expected. If an entry is not applicable, indicate ''none.'' Journal entries for the hedge if it is structured as a forecasted transaction; Journal entries for the hedge if it is structured as a rm commitment; Financial statement summaries for each of the above. (2) Price-Decreasing Assuming a price-decreasing scenario, use Tables 6, 7, and 9 to complete the following (clearly label each account, i.e., futures, rm commitment, Gain/LossIncome Statement (IS), Gain/LossOther Comprehensive Income (OCI)). Journal entries for the hedge if it is structured as a forecasted transaction; Journal entries for the hedge if it is structured as a rm commitment; Financial statement summaries for each of the above. (3) Evaluate the two transaction structures and hedging strategies discussed above and prepare a memo to the Board of Directors clearly explaining the following (use Table 10 to compare the two transaction structures): a. The difference between the forecasted transaction and the rm commitment and pros/cons of structuring the transaction with the supplier as one or the other; b. The concepts behind cash ow and fair value hedging and the accounting treatment of each as it relates to these transactions; c. The documentation requirements (including the timing of any required documentation) in order to qualify for hedge accounting treatment under SFAS No. 133; d. The overall impact on the nancial statements if the hedge is a cash ow hedge versus a fair value hedge and whether oil prices are increasing or decreasing (use the tables and summaries completed in Requirements 1 and 2 above); e. The circumstances under which you would recommend one transaction structure versus the other. Issues in Accounting Education, February 2008 107 Accounting for Derivatives and Hedging Activities TABLE 1 Cash Flow Hedge of Available-for-Sale Security Portfolio (in 000s) October 31 Stock Price Option Value: Time Value (TV) Intrinsic Value (IV) November 30 December 31 January 31 $40 $45 $44 $43 $3 $0 $3 $1.6 $1.0a $2.6 $0 $2b $2 ($45 Strike Price) Entries for AFS Securities Entries for Put OptionTV Entries for Put OptionIV Entries for Settlement a b (IV $45 strike $44 spot) (IV $45 strike $43 spot) TABLE 2 Fair Value Hedge of Available-for-Sale Security Portfolio (in 000s) October 31 Stock Price Option Value: Time Value (TV) Intrinsic Value (IV) November 30 December 31 January 31 $40 $45 $44 $43 $3 $0 $3 $1.6 $1.0a $2.6 $0 $2b $2 ($45 Strike Price) Entries for AFS Securities Entries for Put OptionTV Entries for Put OptionIV Entries for Settlement a b (IV $45 strike $44 spot) (IV $45 strike $43 spot) Issues in Accounting Education, February 2008 108 Smith and Kohlbeck TABLE 3 Summary of Financial Statement Impact October 31 November 30 December 31 Panel A: Hedge of Cash Flows from Available-for-Sale Security Portfolio (in 000s) Changes in Balance Sheet: Assets Liabilities EquityOCI EquityNI Cash ows Stock Value Put Option Total Investment Value Panel B: Hedge of Fair Value of Available-for-Sale Security Portfolio (in 000s) Changes in Balance Sheet: Assets Liabilities EquityOCI EquityNI Cash ows Stock Value IV of Put Option Hedged Fair Value TV of Put Option Total Investment Value Issues in Accounting Education, February 2008 January 31 109 Accounting for Derivatives and Hedging Activities TABLE 4 Price-Increasing Scenario Cash Flow Hedge of Forecasted Transaction October 31 Nov 30 Dec 31 Jan 31 March 31 $35 $39 $40 $41 $37 $38 $44 $44 $46 Oil Price Futures Rate Entries for the Futures Contract (Contract to BUY) Entries for the Forecasted Transaction TABLE 5 Price-Increasing Scenario Fair Value Hedge of Firm Commitment October 31 Dec 31 Jan 31 March 31 $35 $39 Oil Price Futures Rate Nov 30 $40 $41 $37 $38 $44 $44 $46 Entries for the Futures Contract (Contract to SELL) Entries for the Firm Commitment (Contract to BUY) TABLE 6 Price-Decreasing Scenario Cash Flow Hedge of Forecasted Transaction October 31 Oil Price Futures Rate Nov 30 Dec 31 Jan 31 March 31 $35 $39 $32 $34 $34 $35 $30 $30 $29 Entries for the Futures Contract (Contract to BUY) Entries for the Forecasted Transaction Issues in Accounting Education, February 2008 110 Smith and Kohlbeck TABLE 7 Price-Decreasing Scenario Fair Value Hedge of Firm Commitment October 31 Dec 31 Jan 31 March 31 $35 $39 Oil Price Futures Rate Nov 30 $32 $34 $34 $35 $30 $30 $29 Entries for the Futures Contract (Contract to SELL) Entries for the Firm Commitment (Contract to BUY) TABLE 8 Summary of Financial Statement Impact Price-Increasing Scenarios Oct 31 Nov 30 Cash Flow Hedge (Converting Floating to Fixed) Changes in Balance Sheet: Assets Liabilities EquityOCI EquityNI Cash Flows Value of Futures Contract Inventory value Fair Value Hedge (Converting Fixed to Floating) Changes in Balance Sheet: Assets Liabilities EquityOCI EquityNI Cash Flows Value of Futures Contract Value of Firm Commitment Inventory Value Issues in Accounting Education, February 2008 Dec 31 Jan 31 Mar 31 111 Accounting for Derivatives and Hedging Activities TABLE 9 Summary of Financial Statement Impact Price-Decreasing Scenarios Oct 31 Nov 30 Dec 31 Jan 31 Mar 31 Cash Flow Hedge (Converting Floating to Fixed) Changes in Balance Sheet: Assets Liabilities EquityOCI EquityNI Cash Flows Value of Futures Contract Inventory Value Fair Value Hedge (Converting Fixed to Floating) Changes in Balance Sheet: Assets Liabilities EquityOCI EquityNI Cash Flows Value of Futures Contract Value of Firm Commitment Inventory Value Issues in Accounting Education, February 2008 112 Smith and Kohlbeck TABLE 10 Summary of All Hedging Scenarios Cash Flow Hedge: Floating to Fixed Balance Sheet Volatility? (Yes or No) Cash Flow (Fixed) Inventory Value (Floating) Cost of Goods Sold (Fixed) Prot (Loss) Balance Sheet Volatility? (Yes or No) Cash Flow (Floating) Inventory Value (Floating) Cost of Goods Sold (Floating) Prot (Loss) Prices Increasing Prices Decreasing Fair Value Hedge: Fixed to Floating Prices Increasing Prices Decreasing REFERENCES Financial Accounting Standards Board (FASB). 1993. Accounting for Certain Investments in Debt and Equity Securities. Statement No. 115. Norwalk, CT: FASB. . 1998. Accounting for Derivative Instruments and Hedging Activities. Statement No. 133. Norwalk, CT: FASB. Issues in Accounting Education, February 2008 Accounting for Derivatives and Hedging Activities 113 CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE Introduction This case provides a comprehensive, yet simplistic, application of Statement of Financial Accounting Standard No. 133, Accounting for Derivatives and Hedging Activities (SFAS No. 133, FASB 1998). SFAS No. 133 is perhaps the most technically complex set of accounting standards to date, and most accounting faculty have very little, if any, practical experience with derivatives and hedging. Gaining an understanding of this topic can be challenging; teaching this topic is even more challenging. Since few instructors can teach this topic using rst-hand experiences, this case allows for faculty to use a holistic approach for teaching the complexities of hedging. The fact patterns reect economic risks and the hedging alternatives available to hedge these risks. A primary benet of this case is the exibility with which it can be used (see ''Implementation Guidance'' section below). Another benet is the comprehensive nature of the case. The scenarios in Part A and Part B are designed so students can see the overall differences in cash ow versus fair value hedging. This is a benet over most textbook exercises that display only component parts of a hedge transaction. The piecemeal approach of textbook problems is benecial to learning the component parts but does not aid in the understanding of the overall impact of, or motivation for, hedge transactions. An underlying benet is demonstrating that the hedge structure precedes the hedge accounting. Learning Objectives The case asks students to evaluate the accounting and reporting that follows an economic business decision. That is, the case provides an opportunity to emphasize that accounting and reporting should not lead economic decisions, but instead that accounting follows and reports economic outcomes. The case encourages students to learn how and why companies hedge the exposure of a particular risk. To this end, the case focuses on the nancial statement reporting of each alternative, as students learn how to account for the derivatives and hedging activities. Further, the case challenges students to think about hedging risk from a ''big picture'' perspective by requiring students to compare cash ow versus fair value hedge structures and the resiliency of the hedges under the alternative pricing scenarios. Often students complete an assignment and do not think about alternative solutions or the implications if circumstances change. Completion of the nancial statement summaries provides students with an opportunity to compare and contrast the impact of the hedge structures and the pricing scenarios. The nancial statement summaries can be used in class to focus attention on the overall reasons for the hedge instead of on the detailed mechanics of the entries. By completely this case successfully, students should be able to: 1. Understand the difference between fair value and cash ow hedge accounting; 2. Understand the nancial statement impact of fair value and cash ow hedge accounting; 3. Understand that economic risk should be the motivating force behind the hedge structure; 4. Understand the difference between a forecasted transaction and a rm commitment; 5. Understand the documentation requirements to qualify for hedge accounting; and 6. Understand the impact of price changes on the hedge structure. Issues in Accounting Education, February 2008 114 Smith and Kohlbeck Implementation Guidance This case can be used in intermediate, advanced, or special topics accounting courses. The case provides exibility as to how it can be used, depending on the background material available to the students, the class time dedicated to the topic, and the instructor's learning objective. Because of the complexity of the topic and the magnitude of entries and scenarios, the authors have found that using an approach called ''scaffolding'' helps provide an infrastructure to students as they learn the mechanics of the hedge entries (Chang et al. 2002; Hartman 2002; McKenzie 2000). Scaffolding is discussed further in the ''Use in Intermediate Accounting'' section. The tables included in the case provide an infrastructure and visual depiction of the simultaneous transactions that occur in a hedge. Completion of the journal entries using these tables gives structure to the assignment and provides students an opportunity to point out the different accounting treatment for each hedge. The instructor can use these tables to walk students through the entries for one or more of the hedging transactions and to communicate key points for each transaction. The transaction walk-through is important in implementing scaffolding and is discussed in the following section. Part A of the case is best suited for an intermediate class, and Parts A and B together are best suited for an advanced accounting class. Use in Intermediate Accounting Part A can be used as an in-class or out-of-class exercise to demonstrate cash ow and fair value hedge accounting for a recognized asset. The instructor can use Part A as an inclass exercise to walk students through the entries after the students have read assigned material in the textbook or other readings on the topic. The following demonstrates the scaffolding technique for Part A. The instructor starts with entries for the available-for-sale (AFS) security on October 31, asking students for input as to what that entry should be. The instructor writes the entry in the appropriate boxes in Table 1 using information from the Teaching Notes and then moves on to the next required entry. As each entry is completed, instructors should also solicit the rationale or reasoning for each entry from the students. This approach provides the students an opportunity to learn by following along in class. The entries for the put option are separated into its two value components: time value (TV) and intrinsic value (IV). Walking through the entries for the put option in this manner presents instructors with an opportunity to explain these two components. This also provides an opportunity for instructors to point out that it is the changes in the stock price and the put option that represent the hedge. By separating the value of the put into time value and intrinsic value, it is easier for students to see that the changes in the intrinsic value offset the changes in the stock price and are the effective part of the hedge. It is also easier for students to see the accounting differences between the cash ow and fair value hedge. After all the entries are completed, the students can complete the nancial statement summaries as an out-of-class assignment or in-class in teams. Completing the nancial statement summaries helps students see the impact of the accounting on the nancial statements and provides a basis for a class discussion on the differences between a cash ow and fair value hedge. Use in Advanced Accounting or Special Topics If this topic is covered in an advanced accounting course, then Part A and Part B can be assigned in stages. One of the authors had success using this case in an advanced Issues in Accounting Education, February 2008 Accounting for Derivatives and Hedging Activities 115 accounting class over a two-week (four classes) period. While textbook reading gives students the background and terminology needed for the case, the students learn the mechanics and concepts of hedging through the case materials.3 The entries for Part A can be completed by the students out of class, walked through in class (as described above), or handed out to the students already completed. Regardless of which way the students are assigned the entries, the nancial statement summaries should be discussed in class to make sure everyone understands the difference between a cash ow and fair value hedge. Part B is more advanced and requires students to complete the cash ow and fair value hedge accounting entries when prices are increasing and then again assuming that prices are decreasing. Completing the entries for a different pricing scenario provides opportunity to practice the entries and provides an opportunity to evaluate the robustness of the hedging strategy. Again, the instructor can walk through the entries in class for the price-increasing scenario and let the students complete the price-decreasing scenario. Care should be taken that the students have the entries for the hedges completed correctly before they write their memos. Because the memo is such a strong learning tool, we do not want the students to spend time learning the wrong things. Therefore, instructors should provide students with check gures for the scenarios completed out-of-class if the memo is assigned. The memo requires students to explain that the transaction can be structured as a forecasted transaction or a rm commitment, and that the hedge accounting requirements that follow the transaction structure. In their memos, students must also explain the documentation requirements, and the overall impact on the nancial statements of each hedge strategy under each pricing scenario. Students who have completed this case have found that writing a memo that compares the hedges under the price-increasing and -decreasing scenarios yielded increased understanding and enhanced their ability to articulate that understanding. Certain simplications have been made in Part B to reduce the case complexity. There is no time value assigned to the futures contract, making the hedges 100 percent effective. In practice there may be some time value, but in most cases, it would be a minimal amount and is therefore ignored here. If there were an ineffective portion to the hedges in Part B, then it would not make a difference in the nancial statement summaries used to compare the two hedge structures. The ineffective part of a hedge is reected in earnings for both a cash ow and fair value hedge. Therefore, for comparison purposes, there is no incremental issue to analyze. However, the following questions generate great discussion in class: What if there was an ineffective part of this hedge? How would it be reected in the cash ow hedge? How would it be reected in the fair value hedge? No additional material or labor costs are added to the oil (the inventory) purposefully, so the raw cost of the inventory can be traced to the sales date. The case is intended to display a component part of the raw material inventory. The inventory is not transformed, so the difference in the selling price and cost of goods sold is easily traceable. In practice, the inventory may have had material and labor costs added during the manufacturing process. Student Reactions to the Case This case has been used in undergraduate and graduate classes. It has been used as the primary instructional resource for teaching derivatives and hedging, and it has been used 3 The primer included in the Teaching Notes can be used to provide background reading if derivatives are not covered in the textbook. Issues in Accounting Education, February 2008 116 Smith and Kohlbeck as an outside class assignment, where teams of students were assigned part of the case and were required to present their part to the rest of the class. Despite the complexity of the material, the overall response to the case was positive. The biggest issue brought up by the students was overcoming the terminology and the desire to spend more time on the topic. Many students felt that they were barely grasping the concepts, which is understandable if this is the rst time they were exposed to the topic. Exhibit 1 summarizes the results of the survey administered to 150 students who completed the case. This exhibit also presents sample student responses from the two openended questions included in the survey. EXHIBIT 1 Student Survey Results (1 Strongly disagree, 5 Strongly agree) Mean Response 1. 2. 3. 4. 5. The case helped me understand the difference between fair value and cash ow hedge accounting. The case helped me understand the nancial statement impact of fair value and cash ow hedge accounting. The case helped me understand that economic risk should be the motivating force behind the hedge structure. The case helped me understand the documentation requirements for hedge accounting. The case familiarized me with the impact of different pricing scenarios on hedge strategies. 4.09 3.96 3.63 3.81 3.89 Open-Ended Questions Did you nd anything in the case unclear or unrealistic? If so, what specic part(s) of the case were unclear or unrealistic? ''I think the 100% effectiveness of the hedge was unrealistic, but it made the hedge accounting and objectives more clear.'' ''I think the case is a good learning tool. It really helps when trying to tackle the effects and treatment of hedges.'' ''Extremely simpliedhowever, this is more instructive than a realistic scenario.'' ''The case was straightforward.'' ''If it wasn't oversimplied, I would have never gotten it.'' ''It was difcult to nd guidance on rm commitments and forecasted transactions.'' ''This is hard concept to understand. More background and guidance needs to be given.'' Would you recommend that instructors at other universities use this case? Why or why not? ''Yes, denitely ... it was very interesting and educational. It made a hard concept easier to grasp.'' ''Yes, it helps bring all the hedge accounting issues together and helps us learn how to communicate the information to management with good writing skills.'' ''Yes, it forces you to work with a fair value and cash ow hedge. It also forces you to explain the transactions in your own words, which is a huge learning tool.'' ''I would recommend the case because it forced me to understand and explain the principles and conceptual knowledge behind the journal entries.'' ''Before writing the memo it was not clear at all. But after writing the memo I had some sort of idea.'' (continued on next page) Issues in Accounting Education, February 2008 117 Accounting for Derivatives and Hedging Activities EXHIBIT 1 (continued) ''It was hard, but a good tool.'' 'Yes, but there should be more explanations.'' ' ''Yes, I recommend other instructors to use it. Derivative and hedging are difcult concepts. But after I read the textbook and other materials and write a memo ... everything gets clearer.'' ''Yes, it is a good case to understanding, but should be preceded with more guidance if being used in a similar context.'' ''Yes, it was a very clear comparison and portrayed the difference between the two hedges very well.'' ''It was a good idea, but it was denitely a hard case.'' ''I would recommend it. It was tough, but a good review of hedging. It is a nice challenge.'' ''No. Why bother torturing students with something that nobody could possibly have been condent about and that many didn't get correct.'' TEACHING NOTES Teaching Notes are available only to full-member subscribers to Issues in Accounting Education through the American Accounting Association's electronic publications system at http://www.atypon-link.com/action/showPublisherJournals?codeAAA. Full-member subscribers should use their personalized usernames and passwords for entry into the system where the Teaching Notes can be reviewed and printed. If you are a full member of AAA with a subscription to Issues in Accounting Education and have any trouble accessing this material, then please contact the AAA headquarters ofce at ofce@aaahq.org or (941) 921-7747. REFERENCES Chang, K., I. Chen, and Y. Sung. 2002. The effect of concept mapping to enhance text comprehension and summarization. The Journal of Experimental Education 71 (1): 5-23. Financial Accounting Standards Board (FASB). 1998. Accounting for Derivative Instruments and Hedging Activities. Statement No. 133. Norwalk, CT: FASB. Hartman, H. 2002. Scaffolding and cooperative learning. In Human Learning and Instruction, 23-69. New York, NY: City College-CUNY. McKenzie, J. 2000. Scaffolding for success. Electronic version. Beyond Technology, Questioning, Research and the Information Literate School Community. Available at: http: / / fno.org / dec99 / scaffold.html. Issues in Accounting Education, February 2008