Reporting entities with foreign currency risk that results in earnings exposure may choose to hedge that risk under ASC 815, Derivatives and Hedging. ASC 815 permits foreign currency to be the designated hedged risk in cash flow hedges, fair value hedges, and hedges of net investments. The basic accounting model for hedging foreign currency risk using the cash flow and fair value hedge accounting models is largely the same as it is for hedges of other risks (e.g., interest rate risk, commodity price risk), but there are some additional requirements for foreign currency hedges.
This chapter focuses on the unique aspects and requirements of foreign currency hedge accounting, such as:
  • The ability to apply either the cash flow or fair value hedge accounting model to hedges of foreign currency-denominated assets or liabilities and unrecognized firm commitments
  • Use of a nonderivative instrument as the hedging instrument in a fair value hedge of an unrecognized firm commitment and hedge of a net investment in a foreign operation
  • The ability to hedge intercompany foreign currency receivables and payables and forecasted intercompany transactions
  • The ability to use intercompany derivatives as hedging instruments in the consolidated financial statements in certain circumstances
  • Hedges of net investments in foreign operations
See DH 5 for an overview of hedge accounting, DH 6 for information on financial hedges, and DH 7 for information on nonfinancial hedges.
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