[Lentilcounter]

Neron Co. has two derivatives related to two different financial instruments, Instrument A and Instrument B, both of which are debt instruments. The derivative related to Instrument A is a fair value hedge, and the derivative related to Instrument B is a cash flow hedge. Neron experienced gains in the value of Instruments A and B due to a change in interest rates. Which of the gains should be reported by Neron in its income statement?

Gain in value of debt Instrument A only is the correct answer.

Initially, I wanted to say that the Gains of A and B should both be reported in the income statement. I am getting confused between a perfect hedge, an effective cash flow hedge, and an ineffective cash flow hedge.

I know that an effective cash flow hedge goes into other comprehensive income. I know that an ineffective cash flow hedge goes into earnings on the income statement. However, I also know that a perfect hedge is where there is no gain or loss.

When I see a problem with a cash flow hedge, the concept of a perfect hedge lingers in my head and trips me up.

Can someone clarify this? Is the cash flow hedge “ineffective” when it results in a loss? What makes it “ineffective”?

Thank you.

BEC = 79

AUD = 79

FAR = 84

REG = 86

Prayer + AICPA blueprints = my success

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Ana]

perfect hedge: no gain or loss (just get it out of your mind, rarely do mcq's cover this other than the 1 questions that says what is a perfect hedge and the answer is not gain or loss)

effective cash flow hedge: g/l are deferred and reported in OCI until income from the cash flows associated with the hedged item are realized

ineffective cash flow hedge: g/l are reported in IS

unfortunately, Becker doesn't explain the diff between effective and ineffective. I believe an effective hedge is one in which the change in fair value, cash flow, or net investment is exactly offset by changes in the hedging instrument. If the change in the hedging instrument is more or less than the change in value, cash flow, or net investment, the extra change is referred to as the portion of the hedge that is not effective.

but overall don't sweat this area too much.

BEC - 78
AUD - 75
REG - 64, 77
FAR - 73, 73, 73, 82
Ethics: 74, 84, 98
Finally done after 23 months.

[Lentilcounter]

thank you

BEC = 79

AUD = 79

FAR = 84

REG = 86

Prayer + AICPA blueprints = my success

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Ana]

seriously hope I was able to help. I know you've had this question before. wish I had a better explanation for you.

BEC - 78
AUD - 75
REG - 64, 77
FAR - 73, 73, 73, 82
Ethics: 74, 84, 98
Finally done after 23 months.

[Author]

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