Cash Flow Hedges Notes (IFRS)

A company has entered into a forward contract using a cash flow hedge related to the purchase of inventory in a foreign currency. Which of the following describes when the forward contract is recorded under IFRS?

At the date the forward contract is entered into

On December 1, Year 8, Exporters Inc., a Canadian public company, sold goods to a Scottish buyer. The sales price of the goods is £200,000, with terms f.o.b. destination. Payment is due on January 31, Year 9.

On December 1, Year 8, Exporters entered into a two-month forward contract to sell £200,000 on January 31, Year 9. Exporters' year end is December 31.

The goods were shipped immediately on December 1, Year 8, and were delivered to the buyer on January 15, Year 9.

Relevant exchange rates are as follows:

	Spot rate	Forward rate for January 31, Year 9, settlement date
December 1, Year 8	£1 = C$1.639	£1 = C$1.656
December 31, Year 8	£1 = C$1.661	£1 = C$1.673
January 15, Year 9	£1 = C$1.657	£1 = C$1.662
January 31, Year 9	£1 = C$1.635

Assume that Exporters elects to use hedge accounting to account for the hedge and designates the hedge as a cash flow hedge.

Which of the following is the sales revenue recognized for the fiscal year ended December 31, Year 8?

$0.00

As the goods were sold f.o.b. destination, revenue is not recorded until the goods are delivered

Which of the following statements correctly describes one of the steps to record a forward contract based on a firm commitment with a cash flow hedge?

At the date the forward contract is entered into, the forward contract is recorded

Which of the following statements best describes how gains and losses are recognized for cash flow hedges?

Gains and losses on the variable side of the hedging instrument are presented in OCI

For a forward contract related to a firm commitment accounted for as a cash flow hedge where the payment date is after the date the goods are received or the sale is made, which of the following is required at the settlement date?

The forward contract is derecognized

On June 3, Arber Co. makes a US$50,000 sale to a customer in Oregon. Per the sales contract, Arber will deliver the goods on August 15, and the sale is recorded on that date. Payment is due from the customer on September 14.

To hedge the risk associated with the sale, Arber entered into a forward contract on June 3 with a bank to sell US$50,000 on September 14, when the customer makes payment. Relevant exchange rates are as follows:

Date	Spot rate	Forward rate for delivery on September 14
June 3	US1 = C$1.2100	US1 = C$1.2025
June 30	US1 = C$1.2000	US1 = C$1.1950
August 15	US1 = C$1.2300	US1 = C$1.2225
September 14	US1 = C$1.2250	N/A

Which of the following best describes how Arber will determine the sales revenue? Assume the company has a June 30 year end, applies hedge accounting, and classifies this transaction as a cash flow hedge.

Sales revenue will be recorded on August 15 at $61500 then decreased by $1000 on August 15, for a total of $60500

Correct! Sales revenue is initially recorded at the sale date at the spot rate (US$50,000 × 1.2300 = $61,500). In addition, any changes in the value of the forward contract between the initiation date and the date the firm commitment (that is, the sale) is recorded are also incorporated into sales revenue [US$50,000 × (1.2225 – 1.2025) = $1,000]. Since the forward rate has increased between June 3 and August 15, Arber’s payable to the bank has increased in Canadian dollars, so this represents a loss through OCI that will decrease the sales revenue

A company makes a purchase of inventory (with payment due on delivery) in a foreign currency and enters into a forward contract to hedge the firm commitment. Assuming the company uses hedge accounting for the forward contract as a cash flow hedge, at which of the following amounts will the inventory be valued?

At the forward rate on the date the forward contract was entered into