Hedging Foreign Exchange Risk

59

there was no need to establish a new hedging relationship because FX gains and losses on the
revaluation of the USD accounts receivable were going to be recorded in P&L and offset by
the revaluation gains and losses of the forward also to be recorded in P&L.
Accounting Entries
The required journal entries were as follows:
1) To record the forward contract trade on 1 October, 20X4
No entries in the financial statements were required as the fair value of the forward contract
was zero.
2) To record the closing of the accounting period on 31 December 20X4:
The change in fair value of the forward since the last valuation was a gain of EUR 1,845,000.
As the hedge was all effective, all this change in fair value was recorded in equity and none
of it recorded in P&L

Fair Value of Derivative (Asset)

Cash flow Hedges (Equity)

1,845,000

1,845,000

3) To record the sale agreement and the end of the hedging relationship on 31 March 20X5:
The sale agreement was recorded at the spot rate ruling on the date the sales are recognised
(1.2950). Therefore, the sales euro amount was EUR 77,220,000 (= 100 million/1.2950)

Accounts Receivable (Asset)

Sales (P&L)

77,220,000

77,220,000

The change in the fair value of the FX forward since the last valuation was a gain of EUR
1,202,000. As the hedge had no ineffectiveness, all this change was also recorded in equity.

Fair Value of Derivative (Asset)

Cash flow Hedges (Equity)

1,202,000

1,202,000

The recognition of the sales transaction in P&L caused the release to P&L of the deferred
hedge results accumulated in equity.

Cash flow Hedges (Equity)

Sales (P&L)

3,047,000

3,047,000