[Anonymous]

Shouldn’t the 400 be a gain instead of a loss? Since the dollar value of the foreign currency actually increased between November 1, 2001, and December 31, 2001.

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The following information pertains to Flint Co.’s sale of 10,000 foreign currency units under a forward contract dated November 1, 20X1, for delivery on January 31, 20X2:

11/01/X1 12/31/X1

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Spot rates $0.80 $0.83

30-day future rates 0.79 0.82

90-day future rates 0.78 0.81

Flint entered into the forward contract in order to speculate in the foreign currency. In Flint’s income statement for the year ended December 31, 20X1, what amount of loss should be reported from this forward contract?

A. $400

B. $300

C. $200

D. $0

Forward rate available for remaining maturity of

contract (30-day rate at 12/31/X1) $ .82

Less contracted forward rate (90-day future rate

at 11/01/X1) .78

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Difference $ .04

Multiplied by foreign currency units x 10,000

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Loss on forward contract to be reported in 20X1 $ 400

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FASB ASC 815-25-35-15 addresses the use of hedges to control for foreign currency exposure. If a derivative qualifies as a hedge, FASB ASC 815-25-35-1 permits companies to match the timing of the gains and losses of hedged items and their hedging derivatives. For a fair value hedge, FASB ASC 815-25-35-1 permits the hedger to record the change in the fair value of the hedged item concurrently with the gain or loss on the hedging derivative. For a cash flow hedge, the effective portion of any changes in the hedging derivative’s fair value is recorded in other comprehensive income until the change in the value of the hedged item is recognized in earnings. If a derivative does not qualify as a hedge, changes in its value must be reported in quarterly earnings.

Speculative contracts do not quality as hedges and are still controlled by FASB ASC 830-20-35-1. For these derivatives, the change in fair value is recognized immediately in net income.