Question

Describe the proper accounting and reporting for a foreign currency fair value hedge.

Answer 1

Fair Value Hedge: Fair value hedge is a hedge of the exposure to changes in fair value of a recognized asset or liability or unrecognized firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss.

Accounting & Reporting:

For fair value hedges of foreign currency denominated assets and liabilities, at each balance sheet date:

1. The hedged asset or liability is adjusted to fair value based on changes in the spot exchange rate, and a foreign exchange gain or loss is recognized in net income.
2. The derivative hedging instrument is adjusted to fair value (resulting in an asset or liability reported on the balance sheet), with the counterpart recognized as a gain or loss in net income.