Cash Flow Hedge

(1) Cash flow hedge of a forecasted purchase transaction

Dec 15, 2014 Dec 31, 2014 Jan 15, 2015
Spot rate 40 50 60
Forward rate 45 55 60

Hedged item Hedging instrument

Dec 15, 2014 No entry No entry
Dec 31, 2014 No entry Forward contract (asset) 10K
Accum OCI-Gain 10K
Jan 15, 2015 Inventory 60K Forward contract (asset) 5K
Cash 60K Accum OCI-Gain 5K
(change in FV)

Cash 15K
Forward contract (asset) 15K
(net settlement)
Notes *Inventory & cash payment are based *If forward rate increased, increase in
on the spot rate on the actual Accum OCI
transaction date *If forward rate decreased, decrease
*The gain in OCI will remain in OCI in Accum OCI
until it is sold. Once it is sold, there *On the actual transaction date, net
will be a reclassification of OCI to P/L cash settlement should be equal to the
as a reduction to CGS. (If there is a forward rate on Dec 15, 2014.
loss in OCI, then addition to CGS).

(2) Cash flow hedge of a forecasted sale transaction – present value

Hedged item Hedging instrument
Notes *AR is based on the spot rate on the *PV = 1 on settlement date
actual transaction date *If forward rate increased, decrease in
* Sales is based on the spot rate on Accum OCI
the actual transaction date, but it *If forwad rate decreased, increase in
should be adjusted to reflect the gain Accum OCI
or loss in reclassifying OCI to P/L
 If OCI-gain, addition to Sales
 If OCI-loss, reduction to Sales
 Net effect on sales: Sales will be
based on the spot rate on the
date it entered into a forward
contract