Learn Best Practice Accounting for FX Derivatives

Foreign exchange accounting is a complex area of financial reporting that many global organizations struggle with. Adding to that complexity, companies engaged in foreign exchange risk management must also learn how to account for currency derivatives. While the specific accounting rules differ between generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), the fundamental concepts are essential to understand when implementing foreign exchange risk management best practices for your international business.

Companies that hedge foreign exchange risk often have two main objectives: (1) To minimize the Income Statement impact of fluctuating foreign exchange rates, and (2) to reduce the variability in functional currency equivalent cash flows resulting from foreign currency transactions. In order to achieve the objective of minimizing the Income Statement impact of fluctuating foreign exchange rates, it is important to first consider the accounting treatment for the underlying position, and then to align the accounting treatment for the FX derivative accordingly.

At the highest level, companies can account for FX derivatives using “default” accounting treatment or “elective” accounting treatment. The “default accounting treatment requires that derivative gains and losses should be recorded in earnings on a current basis based on changes in their fair market value. The “elective” accounting treatment permits special accounting that results in changes in the fair value of the derivative to be recorded in the equity section of the balance sheet (rather than earnings) as part of other comprehensive income and then reclassified from the balance sheet to the income statement in the period or periods in which the underlying hedged item impacts consolidated earnings.

While the rules of elective accounting treatment can get quite complex, the key take away is that elective accounting treatment provides financial reporting benefits when hedging underlying exposures that do not impact the income statement on a current basis, such as forecasted transactions. Therefore, firms have a choice between the “default” and “elective” accounting treatment. FX Initiative’s currency risk management training addresses several variables to consider when choosing the most appropriate course of action for FX derivative accounting.

If you are interested in learning more about accounting for FX derivatives, FX Initiative’s currency risk management training walks you through real-world scenarios using Apple as an example. Specifically, we cover hedging forecasted revenue transactions, booked receivable transactions, and net investments in foreign subsidiaries using both elective and default accounting treatment. Learning how to account for FX derivatives is critical in order to achieve your foreign exchange risk management objectives. Start learning today by taking the FX Initiative!

Are you ready to learn best practice accounting for FX derivatives? Click here to take the FX Initiative!

Cheers,

The FX Initiative Team
support@fxinitiative.com