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April/May 2021 » Hedges of Unrecognized Foreign...
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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 unrecognized firm commitments denominated in a foreign currency. Forward contracts reduce the foreign exchange risk of the change in the dollar value of firm commitments resulting from changes in foreign exchange rates during a period. Management has the choice of designating foreign currency forward contracts as fair value hedges or cash flow hedges of unrecognized firm commitments denominated in a foreign currency, and of assessing hedge effectiveness based on changes in spot rates or changes in forward rates. This article addresses the similarities and differences in the accounting for different hedge designations and hedge effectiveness bases for foreign currency forward contract hedges of unrecognized foreign currency–denominated firm commitments for the purchase of inventory.
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