Options #1 & #2: Connect Homework Assignment and Written Assignment

Learning Outcomes for this Module Reminder:

1. Analyze the accounting required for hedging an unrecognized foreign currency firm commitment with a fair value hedge under the US GAAP.

2. Analyze the accounting required for hedging an unrecognized foreign currency firm commitment with a cash value hedge under the US GAAP.

3. Evaluate the accounting required when a U.S. company speculates with a forward exchange contract including hedge effectiveness under the US GAAP.

4. Evaluate other financial instruments used by U.S. multinational companies including forwards, futures, options, and swaps, including examples of options related to cash flow and fair value hedges under the US GAAP.

5. Analyze the financial reporting and disclosure requirements about the fair value of financial instruments under the US GAAP and the differences between the US GAAP and IFRS.

Please help answer the following questions:

1. Your Company has suddenly and unexpectedly had a large sale denominated in Euros overseas. The payment for the sale will be received according to the terms of the contract with the customer in 30 days. Would you recommend to the Controller executing a forward exchange contract in this situation? Why or why not? Be specific.

2. A cash flow hedge is a hedge of the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction, that is attributable to a particular risk. It is possible to only hedge the risks associated with a portion of an asset, liability, or forecasted transaction, as long as the effectiveness of the related hedge can be measured. Explain the accounting for a cash flow hedge for the effective and the ineffective portion of any gain or loss for the hedging item and the hedged item on the income statement and the statement of OCI. For a cash flow hedge, when a hedging transaction relates to a forecasted transaction, when should the any gains or losses be reclassified from OCI to earnings? Finally, under what circumstances or situations should cash flow hedges be terminated? Be specific.

3. A fair value hedge is a hedge of the exposure to changes in the fair value of an asset or liability. It is used to minimize fluctuations in earnings caused by changes in fair values.

4. Explain how the accounting for a fair value hedge differs for the hedged item and for the hedging item compared to the accounting for a cash flow hedge. Be specific and include an example, if you need to, to explain the difference.