Notecards I made from Wiley's 2012 CPA Exam Review
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| show | The US company enters into a transaction with a foreign entity, and transaction is denominated in foreign currency units. May cause a foreign currency transaction gain or loss to be recognized in US companies income statement
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| show | US dollars, using the current spot rate of the foreign currency to convert
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| In a foreign currency transaction, what happens if there is an accounts receivable of a foreign currency on the date of the financial statements are created? | show 🗑
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| show | Yes, by difference of spot rate
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| show | instrument that derives its value as a financial instrument from something outside the instrument. (i.e. call option because value is derived by market price of its related stock)
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| In regards to derivative instruments, what is the underlying? the notional amount? | show 🗑
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| show | 1. Fair value
2. appear in comprehensive income or reported in current earnings
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| What is a fair value hedge? Cash flow hedge? foreign currency hedge? | show 🗑
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| What three characteristics of a derivative instrument must be present for it to be considered a derivative instrument? | show 🗑
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| What specific instruments are thought of as derivatives? | show 🗑
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| show | two companies decide to swap interest payments on debt. One has fixed debt and thinks rates will drop, One has variable debt and thinks rates will rise
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| show | May have to separate ('bifurcate') derivative from host. Host would be accounted for as if derivative were never apart of and derivative accounted for using rules for derivatives
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| show | 1. embedded derivative meets definition of derivative
2. hybrid instrument not regularly recorded at FV
3. economic characteristics/risks of embedded derivative are not clearly and closely related to to those of the host contract
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| If the holder of a hybrid instrument chooses not to bifurcate the instrument, how is it accounted for then? | show 🗑
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| show | 1. Documentation at the beginning must provide the objective and strategy of the hedge, the hedging instrument and the hedged item, how the effectiveness will be assessed
2. must be highly effective throughout its life
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| show | 1. hedge's ability to offset changes in value of the hedged item
2. every 3 months and when earnings or financial statements are reported
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| show | 1. hedged item must be all or a specific portion of a recognized asset/liability or an unrecognized firm commitment (must be binding on both parties, specific terms, contain nonperformance clause- makes performance probable)
2. in current earnings
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| show | 1.Diff between option price and intrinsic value. Zero at exercise date.
2. Greater of zero or diff between stock (exercise) price and exercise (stock) price in call (put)
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| show | 1hedged asset/liability must be linked(basis for change in cash flow is the same) to hedged instrument
2must be highly effective
3if forecasted transaction must be considered probable
4if forecasted is series of transactions, must share same risk expos
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| What is the accounting necessary for a cash flow hedge? | show 🗑
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| show | 1. cannot be traded on an exchange in the investor's functional currency
2. dividends must be denominated in same foreign currency as is expected to be received on sale of the security
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| How are foreign currency hedges accounted for if they are classified as unrecognized firm commitments? available-for-sale? foreign currency denominated forecasted transactions? net investments in foreign operations? | show 🗑
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| What do you use to estimate the FV of a forward exchange contract? | show 🗑
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| show | 1. objectives and strategies for achieving
2. context to understand the instrument
3. risk management policies
4. list of the hedged instruments
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