Wiley CPAexcel Exam Review 2014 Study Guide, Financial Accounting and Reporting

Module 19: Derivative Instruments and Hedging Activities

Overview

This module covers foreign currency transactions (foreign currency translations are discussed in Module 20), derivative instruments, and hedging activities. A foreign currency transaction is a transaction denominated in a currency other than the entity’s functional currency. Foreign currency transactions are discussed in this module because exchange rate risk can be hedged.

A. Foreign Currency Transactions

B. Derivative Instruments and Hedging Activities

C. Research Component—Accounting Standards Codification

D. International Financial Reporting Standards (IFRS)

Key Terms

Multiple-Choice Questions

Multiple-Choice Answers and Explanations

Simulations

Simulation Solutions

A derivative instrument derives its value as a financial instrument from something else and must meet three specific criteria to qualify as such. These criteria are discussed in this module. The most relevant measure for reporting derivatives is fair value. Some instruments, hybrid instruments, must be bifurcated (separated) between the derivative and the basic contract.

Hedging instruments are derivative instruments that meet two primary criteria: (1) sufficient documentation relating to the objective of the hedge, identification of the hedge, and the assessment of the hedge must be provided and (2) the hedge must be highly effective. Hedges are classified as fair value hedges, cash flow hedges, or foreign currency hedges.

Derivative accounting and ...