MSH Corporation uses gold to manufacture jewelry. MSH anticipates the need for gold on June 30th for goods that will be sold on September 30th. Concerned that the price of gold will increase, MSH purchases a futures contract and designates the contract as a cash flow hedge. As it turns out, the spot price of gold was lower at the end of June when the contract was settled. When should MSH recognize the loss on the futures contract in the income statement and should the loss be included in income from continuing operations (IFCO)? Date loss is recognized Loss included in IFCO A) September 30th No B) June 30th Yes C) September 30th Yes Your answer: B was incorrect. The correct answer was C) September 30th Yes On June 30th, the loss on the futures contract should be reported in other comprehensive income. When the goods are sold on September 30th, the loss should be recognized in the income statement along with the cost of goods sold which is lower since the price of gold declined. The loss is neither extraordinary nor related to a discontinued operation. Thus, the loss is reported “above the line” as a part of income from continued operations.
I did a C on this.
Is this in derivatives at all swaption?
It a little reading somwhere in FSA. How I thought abt it was that the final price of gold was lower, but he had a future on gold to protect him from price hike in gold for the remainder of 90 days. So though the prevaline market price was lower than what the contract states, he is at a loss because he has to respect the contract and get the gold at the higher contract price. So basically the CFH was uneffective. This uneffective portion of the CFH hits the income statement right away. - I don’t know if that is even 0.1% true.
not in derivatives. This is in the chapter on Financial Statement quality. 5th point. Understand the Risks. Use of FV Hedge, Cash flow hedge, foreign currency hedge. And where do they figure on the gain / loss side - whether income statement, balance sheet? hedge instrument is a derivative. Derivative is always on the balance sheet at the Fair value. fair value hedge - unrealized gains /losses from derivative + hedged asset or liability ON income statement. cash flow hedge - unrealized gains / losses from the derivative bypass income statement are on the U portion of PUFE -> OCI of balance sheet. Foreign currency hedge - gains / losses - bypass income statement and are on the F portion of PUFE in the OCI. … For all three hedges above -> ineffective portion of the hedge is recognized on the income statement.
Is there any difference in the treatment of a foreign currency hegde if the financials are translated using temporal method as opposed to all current? Since in the temporal method, the CTA flows to the income statement, I would imagine the unrealized gains and losses on the hedge go there as well…as opposed to comprehensive income Any ideas?
Nope, hedges still go to equity. In the case of all-current it goes together with CTA, in the case of temporal, it’s on its own in OCI