Hedges of Recognized Foreign Currency–Denominated Assets and Liabilities

Applying ASU 2017-12

Robert G. Rambo, PhD, CPA

Accounting Standards Update 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, modifies the accounting and reporting of foreign currency forward contract hedges of recognized assets and liabilities denominated in a foreign currency. Management has the option of designating foreign currency forward contracts as fair value hedges, as cash flow hedges with hedge effectiveness based on changes in spot rates, or as cash flow hedges with hedge effectiveness based on changes in forward rates of recognized assets or liabilities denominated in a foreign currency. To illustrate the similarities and differences in the accounting for the three hedge designations, this article addresses the hedging of a foreign currency receivable from the purchase of inventory.