Accounting for Derivatives and

Hedging Activities (Cont..)

Fair Value Hedge Accounting: Foreign Currency–Denominated
Receivable Example

ILLUSTRATION: HEDGE AGAINST

EXPOSED NET ASSET (ACCOUNTS
RECEIVABLE) POSITIONS
• U.S. Oil Company sells oil to Monato Company of
Japan for 15,000,000 yen on December 1, 2016.
• The billing date for the sale is December 1, 2016,
and payment is due in 60 days, on January 30,
2017.
• Concurrent with the sale, U.S. Oil enters into a
forward contract to deliver 15,000,000 yen to its
exchange broker in 60 days. This transaction will
not be settled net. The yen will be delivered to
the broker.

The bold rates are the relevant rates for accounting purposes
• Journal entries on the books of U.S. Oil are as
follows:
• U.S. Oil Company sells oil to Monato Company of
Japan for 15,000,000 yen on December 1, 2016.
• The billing date for the sale is December 1, 2016,
and payment is due in 60 days, on January 30,
2017.
• Concurrent with the sale, U.S. Oil enters into a
forward contract to deliver 15,000,000 yen to its
exchange broker in 60 days. This transaction will
not be settled net. The yen will be delivered to
the broker.

The bold rates are the relevant rates for accounting purposes
• At December 31, 2016, the accounts receivable from
the sale is adjusted to reflect the current exchange
rate

• Calculating the exchange gain on the forward:

• 15,000,000 yen*($0.007490 - $0.007489)/(1.01)
• Over the contract period, the forward rate will
approach the spot rate, exactly equaling it on
the settlement date.
Hedge Against Net Liability Position
Fair Value Hedge Accounting: Foreign Currency

ILLUSTRATION: HEDGE OF AN
IDENTIFIABLE FOREIGN CURRENCY
PURCHASE COMMITMENT
• On October 2, 2016, American Stores Corporation contracts with Canadian
Distillers for purchase of 1,000 cases of bourbon at a price of 60,000
Canadian dollars, when the spot rate for Canadian dollars is $0.70.
• The bourbon is to be delivered in March and payment made in Canadian
dollars on March 31, 2017.
• In order to hedge this future commitment, American Stores enters into a
forward contract to purchase 60,000 Canadian dollars for delivery to
American Stores in 180 days at a forward exchange rate of $0.725.
• Applicable forward rates on December 31, 2016, and March 31, 2017
(because the maturity is March 31, this rate is also the spot rate) are $0.71
and $0.68, respectively.
• By December 31, 2016, the forward exchange rate for Canadian dollars
decreases to $0.71, and American Stores adjusts its receivable to reflect
the 60,000 Canadian dollars at the 90-day forward exchange rate. This
adjustment creates a $900 exchange loss on the forward contract as
follows:
SPECULATION
• On November 2, 2016, U.S. International enters into a 90-day forward
contract (future) to purchase 10,000 euros when the current quotation for
90-day futures in euros is $0.5400. The spot rate for euros on November 2
is $0.5440.

• Journal entries on the books of U.S. International to account for the

speculation are as follows:
THE REST OF CHAPTER IS YOURS