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Accounting standards enable hedge accounting for three different designated forex hedges: A cash flow hedge may be designated for a highly probable forecasted transaction, a firm commitment (not recorded on the balance sheet), foreign currency cash flows of a recognized asset or liability, or a forecasted intercompany transaction.
Here the 80:125 rule applies to the estimated slope; additionally, for the hedge to be deemed effective, the R squared must be better than 0.8. "Variance-reduction test". Also a comparison of the forecast values or cash flows of the hedged item and those of the hedging instrument, but here returning: [4]
A cash flow hedge [1] is a hedge of the exposure to the variability of cash flow that: is attributable to a particular risk associated with a recognized asset or liability. Such as all or some future interest payments on variable rate debt or a highly probable forecast transaction and; could affect profit or loss (IAS 39, §86b)
A foreign exchange hedge transfers the foreign exchange risk from the trading or investing company to a business that carries the risk, such as a bank. There is a cost to the company for setting up a hedge. By setting up a hedge, the company also forgoes any profit if the movement in the exchange rate would be favourable to it.
A journal entry is the act of keeping or making records of any transactions either economic or non-economic. Transactions are listed in an accounting journal that shows a company's debit and credit balances. The journal entry can consist of several recordings, each of which is either a debit or a credit. The total of the debits must equal the ...
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Lastly, in a situation where the foreign currency contracts are part of a qualifying hedging arrangement, then they should be accounted as per the hedge accounting rules (Parameswaran, 2011). Using the provided information the accounting journal entries should be as follows; As at the date of the transaction