Hedging Recognized Foreign Currency Denominated Receivables or Payables

Abstract

Entities frequently acquire foreign currency forward or option contracts to mitigate the exposure of recognized foreign currency-denominated receivables and payables. FASB Accounting Standards Codification 815 supports four designations for such contracts with respect to their corresponding foreign currency-denominated receivables or payables: 1) no hedge; 2) fair value hedge; 3) cash flow hedge with hedge effectiveness based on changes in spot rates; and, 4) cash flow hedge with hedge effectiveness based on changes in the contracts’ total values. Accounting Standards Update No. 2017-12: Targeted Improvements to Accounting for Hedging Activities (FASB 2017) modified the reporting for the gains and losses on foreign currency forward and option contracts designated as hedges. Over sixty-six percent of firms disclosing foreign currency hedges designated foreign currency forward and option contracts as cash flow hedges. This contrasts with the fourteen percent coverage of cash flow hedges in advanced accounting textbooks We provide three examples to supplement current textbook coverage illustrating the accounting for recognized foreign currency receivables and payables and corresponding foreign currency forward and option contracts. We demonstrate the similarities and differences between the four allowable designations and highlight the changes in the reporting of gains and losses in Accounting Standards Update No. 2017-12.