Proceedings of the 12th International Conference on Opportunities and Challenges in Management, Economics and Accounting
Year: 2024
DOI:
[PDF]
Reducing Reporting Risk: Designating Forward Contracts as Cash Flow Hedges of Foreign Currency Denominated Recognized Assets and Liabilities
Dr. Robert G. Rambo
ABSTRACT:
Firms enter into foreign currency forward contracts to mitigate the exposure risk of recognized foreign currency-denominated receivables and payables. IFRS 9 allows management to designate these contracts as either cash flow hedges or fair value hedges. The aggregate effect on earnings of the transaction gain or loss on the foreign currency receivable or payable and the gain or loss on the forward contract is known on the date the forward contract is initiated. The aggregate effect on each period’s earnings during the term of a forward contract designated as a cash-flow hedge with hedge effectiveness based on changes in forward rates is also known on the date the contract is initiated. Therefore, designating forward contracts as cash-flow hedges with hedge effectiveness based on changes in forward rates may suppress volatility in reported earnings compared to the alternative hedge designations. In addition, the reporting risk (the amount of uncertainty surrounding the pending measure of an item to be reported in the financial statements) is also lower. The following examples to illustrating the accounting for foreign currency-denominated accounts receivable hedged with foreign currency forward contracts under IFRS 9. The examples demonstrate the similarities and differences between the allowable alternatives and highlight the reporting of gains and losses in accordance with IFRS 9.
keywords: Forward contracts, hedging, reporting risk