The Lessons We Learn

CFA Level II
#1

Reading 22 Page 294

Question 6: "What impact did the derivatives (future contracts) have on Food-for-All’s 2010 financial statements?

A) g/l on the hedges were recognized in net income

B) ineffective portion of the hedges were recognized in NI

C) effective portions of the hedges were recognized in comprehensive income

I believe B and C are both correct. What confuses me is that Schwesser (2012) page 167 Reading # 25 Says that FV hedge effective and ineffective are recognized in the I/S, while CFA Institute says “The extent to which the hedge is not effective is recognized in the I/S” They say nothing about the effective portion, so I am assuming that the effective portion is OCI.

In the problem the hedge is actually a CF hedge, and the CFA Inst. says “the effective portion of derivatives g/l goes into C.I.” So again, I believe that would mean that the INEFFECTIVE portion would go to the I/S. (Page 290-291, Reading 22, bottom of page)

Given this how is B wrong?

#2

Incase anyone was wondering, I believe I found out the answer, there is an 80-125 rule for Cash Flow Hedges, as long as the CF Hedges are in that range of effectiveness, they are considered 100% effective and all flow through OCI. Therefore, B is incorrect

#3

Hi, this has been discussed before:

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91312146

I have been involved in hedge accounting transaction (although under IFRS and not US GAAP) and I think this question is simply badly written. The authors make some assumptions (or mistakes) which are beyond the scope of this exam. I wouldn’t spend too much time trying to get what they really had in mind.

#4

Yes I did some research on this and I think the curriculum does not cover it adequately/correctly. Thanks for the link to that old thead Wojtek