Assume company A’s opex cost is largely depending on oil price and the company decides to hedge the oil price increase by a forward contract. If the oil price keeps on increasing, any idea how the positive payoff from the forward contract book into company A’s income statement. Will it go to the opex to offsett the oil price/opex increase or it will go to “other operating income” as a positive gain ? Any input appreciated.

trying to remember L2 FSA: aren’t derivatives used for hedging reported directly on the B/S under comprehensive income?

The Big 4 acctng firms all publish thick papers on hedge accounting; google things like “IAS 39” and “FAS 133” and “effectiveness testing”. (IIRC, the general theme is that if you’re hedging for a legitimate business purpose, such as manging cost exposures, then you mark to market _both_ the hedge (derivative) and the original exposure (here, value of the oil expense). As their values tend to move in opposite directions, these marks will mostly cancel, leaving relatively little gain/loss on the combined position. YMMV)

If it falls under the cash flow hedge guidance, the gain would go through OCI until the derivative position is closed. One of the key qualifiers for this type of hedge accounting is whether you are hedging a forecasted commitment that is variable in nature (rather than an asset or liability already on your balance sheet). Any losses however would immediately go to earnings. If it falls under the fair value hedge guidance (applicable in situations where you have an asset or liability on your balance sheet or fixed commitment to hedge), gains and losses on the derivative go through earnings and the hedged asset or liability is also impacted. For example if you have an inventory of copper and you hedge prices with a futures contract, if prices go down (and you are short the futures contract of course), you would write down your inventory but would also have a increase in earnings from the increase in value of the derivative. The two would effectively wash out, and assuming no basis differences, etc, no impact on earnings.