The past months’ volatility in FX rates (in particular the rise in the US dollar) and the worsening global economic situation may affect corporate cash flow hedges in two ways:
- The nearly across-the-board rise in the USD may lead to substantial gains in OCI for hedges covering a long non-USD position; meanwhile
- Actual revenues may fall short of quarterly forecasts.
However, just because companies don’t make their “numbers” does not mean they can automatically take the large gains in OCI on hedges designated for that hedge period and record them in earnings, no matter how tempting.
Under FAS 133 cash-flow hedge requirement, as long as the expected transaction is still probable to occur within an additional two months period (following the hedge period), the gains or losses in OCI that are related to the forecasted transaction must remain in OCI. Only the portion of OCI that is related to the actual revenues can be recorded in income. The accounting in this case is consistent with the economic intent of the hedge. Hedges of expected revenue are designed to deliver a rate, not a gain. Their job is to provide management with predictability as to the expected dollar value corresponding to FX-denominated revenue streams. While the economic down turn certainly makes these OCI gains look particularly attractive, they are inaccessible, at least for now. [Please refer to paragraph 33 and DIG G3 is for further information on this issue.]
Upcoming Hedge Trackers Training
- Dec. 17 (2008) – FAS 161/157 – GAAP Update
- January 22 – FAS 52 & FAS 133 – Key Concepts – 2 Half Days
- January 23 – FAS 133 Practical Applications – Half Day
- February 26 – FAS 161 and FAS 133 – Key Concepts – 2 Half Days
- February 27 – FAS 133 Practical Applications – Half Day
- March 19 – FAS 52 and FAS 133 – Key Concepts – 2 Half Days
- March 20 FAS 133 Practical Applications – Half Day
- April 17– FAS 161/157 – GAAP Update
- May 21 – FAS 52 and FAS 133 Key Concepts – 2 Half Days
- May 22 – FAS 133 Practical Applications – Half Day
- June 23 – Interest Rates & Commodities – 2 Half Days
- July 27 – FAS 52 and FAS 133 Key Concepts – 2 Half Days
- July 28 – FAS 133 Practical Applications – Half Day
- August 19 – IFRS – Half Day
- September 24 – FAS 52 and FAS 133 Key Concepts – 2 Half Days
