Question

Could I please get a step-by-step solution for this:

7.15 Valuation of Derivatives. Financial reporting classifies derivatives as (a) speculative investments, (b) fair value hedges, or (c) cash flow hedges. However, firms revalue all derivatives to market value each period regardless of the firm’s reason for acquiring the derivatives. In addition to increasing or decreasing the derivative asset or liability, the revaluation amount either affects net income immediately or it affects other comprehensive income immediately and net income later. For each type of derivative, describe where firms report the revaluation amount on the financial statements.

Answer 1

For fair value hedge:

If the equity instrument is designated as Fair value through other comprehensive income then gain/loss shall be recognised in other comprehensive income else it should be recognised through Profit and loss.

For cash flow hedge:

The portion of gain and loss that is effective hedge shall be recognised in other comprehensive income and any remaining gain/loss shall be regarded as the hedge ineffectiveness and shall be regarded in profit and loss.

For speculative investements:

If the instrument is regarded as equity fair value through other comprehensive income then the revaluation shall be recognised through the other comprehensive income else it should be recognised in profit and loss.