[Scared-cpa]

In which of the following hedges using a forward contract will at least a portion of any currency exchange gain or loss on the hedging instrument be reported as a translation adjustment in other comprehensive income?

A. Forecasted transaction hedge.

B. Firm commitment hedge.

C. Investment in available-for-sale securities hedge.

D. Net investment in foreign operations hedge.

The answer is D. The explanation is: “The hedge of a net investment in foreign operations is a fair value hedge, but changes in the fair value of the forward contract (hedging instrument) that are equal to or less than the change in the translated value of the financial statements of the foreign operation are reported as a translation adjustment in other comprehensive income. The change in the forward contract reported as a translation adjustment offsets the change in the value of the translated financial statements of the foreign operation, which also are reported as a translation adjustment.”

I just cannot get this, though, for whatever reason. The explanation makes no sense to me. My brain says Available-for-sale = FV hedge = OCI.
I also don’t really understand the “translation adjustment”. What exactly is it? I thought of it as adjusting financial statements of a foreign entity to domestic currency, but I don’t know?

Also, how much hedging is on FAR?

This question came from Wiley CPAexcel btw.

"The more I practice, the luckier I get."

FAR - 67, 82 (Expires 07/31/18)
AUD - 68, 79
REG - 75
BEC - 82

Wiley CPAexcel + Ninja

I cannot believe I am done.

[Stilgoin]

The effective portion of Cash Flow Hedges go to OCI, FV Hedges go to the Income Statement, and unrealized gain of AFS Securities go to OCI. The key to the question is ‘translation adjustment’. Any time you see those words, you should automatically think foreign and OCI. 😉

Stilgoin, CPA

There are enough critics. Be an encourager

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[Scared-cpa]

I'll need to write that down! Haha…it makes more sense, though, now. I always want to associate cash flow anything with the income statement. I guess I correlate cash and income. Anywho, I appreciate your help! (-:

"The more I practice, the luckier I get."

FAR - 67, 82 (Expires 07/31/18)
AUD - 68, 79
REG - 75
BEC - 82

Wiley CPAexcel + Ninja

I cannot believe I am done.

[Stilgoin]

You’re welcome. One more thing- don’t confuse foreign translation with foreign transaction. Foreign financial statement translation G/L goes to OCI- like translating foreign sub financial statements into parent comapany’s currency for financial reporting. Foreign transaction G/L goes to the IS- like euro exchange price went down between the sale and date of payment and you have a gain to report.

Stilgoin, CPA

There are enough critics. Be an encourager

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[Author]

Replies