Week 9_Intro to Hedging - Issues in Corporate Financial...

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1 Issues in Corporate Financial Reporting and Analysis (ACCT3563/3573) Introduction to hedging 2 Learning Objectives Understand a hedged item and hedging instrument Introduction to accounting for cash flow hedges and fair value hedges
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3 References Picker, Chapter 5 (parts 5.3.6 – 5.4 …… pp. 158-167) Deegan, Chapter 31 (Sections 31.1 – 31.6 ….. pp. 1037-1065) AASB 121, “The Effects of Changes in Foreign Exchange Rates” AASB 139 “Financial Instruments: Recognition and Measurement” 4 Financing the purchase of an asset denominated in the same foreign currency Should the adjustments go through different parts of the financial statements when the transactions are so closely linked? Introduction to the notion of ”hedge accounting”
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5 What is a hedge transaction? In undertaking a hedge transaction, an entity is aiming to “ reduce or eliminate …. exposure to price (e.g., exchange rate, interest rate) variations Entities are minimising the adverse impacts of exchange rate movements …… and in some circumstances limiting the potential favourable impacts. 6 What is a hedge transaction? ……. for accounting purposes, an effective hedge is measured by the degree to which changes in fair value or cash flows of a hedged item are offset by changes in the fair value or cash flows of the hedging instrument …...
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