Please use this identifier to cite or link to this item: http://hdl.handle.net/10125/51908

ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS WITH HEDGING DERIVATIVES: A TUTORIAL

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Title: ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS WITH HEDGING DERIVATIVES: A TUTORIAL
Authors: Hwang, Angela Lijyun
Walla, Andrew
Keywords: Accounting for derivatives
Accounting for foreign currency transactions
Accounting for hedging activities
Issue Date: 27 Apr 2017
Abstract: This article provides students with a tutorial to learn accounting for derivative instruments and hedging activities on foreign currency transactions. It can be used in courses that discuss derivative instruments, such as advanced accounting, international accounting, or in a company’s training program. The tutorial helps students develop critical thinking skills in analyzing the impact of different hedging strategies on a firm’s financial statements. The included scenario demonstrates how a US importer uses foreign currency derivatives (forward contract vs. option) to hedge exchange rate fluctuations of a liability (foreign-currency-denominated accounts payable). This situation is applied across five cases to provide a comparative analysis of the reporting results from the use of different accounting treatments (fair value hedge vs. cash flow hedge) for the two derivatives. The base case, Case 0, demonstrates the impact of not using a derivative to mitigate market risk. Cases 1 and 2 demonstrate the application of a fair value hedge in using a forward contract vs. option. Cases 3 and 4 illustrate a cash flow hedge. The tutorial scenario begins with foreign currency appreciation. To ensure learning on the tutorial, a student project is provided in Appendix A when the exchange rates are expected to be volatile. Students are further asked to write a memo to recommend a hedging strategy after technical analysis. By completing the project, students learn to apply critical thinking and communication skills, in addition to gaining technical accounting knowledge. The downloadable spreadsheets below are available to facilitate learning.
Template: https://www.dropbox.com/s/1hdbhf5j85bwx97/FX_Payable-Template.xlsx
Solution: https://www.dropbox.com/s/seudu9piv283cbi/FX_Payable-Solution.pdf?dl=0
Description: Inquiries about this document can be made to HARC@hawaii.edu
URI/DOI: http://hdl.handle.net/10125/51908
Appears in Collections:04 Case Studies (CaseStd)


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