Accounting for Derivatives and Hedging Activities: Comparison of Cash Flow versus Fair Value Hedge Accounting

2008 ◽  
Vol 23 (1) ◽  
pp. 103-117
Author(s):  
Pamela A. Smith ◽  
Mark J. Kohlbeck
Keyword(s):  
Board Of Directors ◽  
Cash Flow ◽  
Fair Value ◽  
Hedge Accounting ◽  
Limited Experience

Warfield Company is considering hedging the risk associated with (1) an available-for-sale (AFS) security portfolio and (2) an anticipated purchase of oil. Warfield's Board of Directors has limited experience in this area and has requested that you summarize the accounting and reporting implications if these items are hedged. The hedged risk in these two transactions can be either the risk associated with the cash flow or the risk associated with changes in the fair value. The two risks are discussed in separate parts of the case.

scholarly journals Financial Statement Outcomes When Alternative Derivative Hedging Designations Exist

2011 ◽  
Vol 19 (3) ◽  
Author(s):  
Arlette C. Wilson ◽  
Ronald L. Clark ◽  
William Pugh
Keyword(s):  
Cash Flow ◽  
Fair Value ◽  
Financial Statement ◽  
Font Size ◽  
Hedge Accounting

<p class="MsoBlockText" style="margin: 0in 0.5in 0pt;"><span style="font-style: normal;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">When alternate reporting methods exist, financial statement preparers tend to select methods that provide more favorable results.<span style="mso-spacerun: yes;">&nbsp; </span>Certain hedging transactions may be designated as either a fair value hedge or a cash flow hedge.<span style="mso-spacerun: yes;">&nbsp; </span>Both designations achieve the objective of matching the gain &lt;loss&gt; on the derivative with the loss &lt;gain&gt; on the hedged item in the same reporting period.<span style="mso-spacerun: yes;">&nbsp; </span>However, the cash flow hedge accounting tends to create a greater appearance of equity volatility.<span style="mso-spacerun: yes;">&nbsp; </span></span></span></span></p>

scholarly journals Hedge Accounting and Market Value of Quoted Manufacturing Firms in Nigeria: Panel Data Evidence

2018 ◽  
Vol 2 (1) ◽  
pp. 21-38
Author(s):  
Alasin Captain Briggs
Keyword(s):  
Panel Data ◽  
Cash Flow ◽  
Significant Relationship ◽  
Oil And Gas ◽  
Market Value ◽  
Fair Value ◽  
Business Environment ◽  
Cross Sectional ◽  
Hedge Accounting ◽  
Oil And Gas Firms

In a developing economy such as Nigeria, the business environment is characterized with risk that affects the operational efficiency and the performance of quoted firms. There is needed to make policies that will hedge against risk in the operating environment. This study examined the effect of hedge accounting on the market value of quoted oil and gas firms. A sample of 10 oil and gas firms was selected based on data quality and availability to address the requirements of the variables in the regression model. The study modeled market value as linear function of cash flow hedging, investment hedging and fair value hedging. Cross sectional data was sources from financial statement of the selected firms from 2011 to 2016. From the panel data result, (Fixed Effect Model) the study found that cash flow hedging have positive and significant relationship with market value while fair value hedging and investment hedging have positive but not significant relationship with market value of the quoted oil and gas firms.   We therefore recommend that hedge accounting policies should be properly integrated to the operational objectives of the firms.

Determinants and Consequences of Firms' Derivative Accounting Decisions

2020 ◽  
Vol 5 (1) ◽  
pp. 81-114 ◽  
Author(s):  
Spencer Pierce
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Fair Value ◽  
Financial Accounting ◽  
Firm Risk ◽  
Accounting Firms ◽  
Earnings Volatility ◽  
Hedge Accounting ◽  
Reported Earnings ◽  
Jel Classifications

ABSTRACTFinancial accounting standards require derivatives to be recognized at fair value with changes in value recognized immediately in earnings. However, if specified criteria are met, firms may use an alternative accounting treatment, hedge accounting, which is intended to better represent the underlying economics of firms' derivative use. Using FAS 161 disclosures, I examine determinants of hedge accounting use and the effects of hedge accounting on financial reporting and capital markets. I find variation in firms' hedge accounting use and provide evidence that compliance costs of applying hedge accounting affect firms' decision to use hedge accounting. Firms decrease their reported earnings volatility via derivatives that receive hedge accounting and could further decrease their earnings volatility if hedge accounting were applied to all their derivatives. Inconsistent with arguments given for using hedge accounting, I fail to find a decrease in investors' assessments of firm risk from using hedge accounting.JEL Classifications: M40; M41; G32.

How do firms manage their interest rate exposure?

2019 ◽  
Vol 20 (5) ◽  
pp. 501-519 ◽  
Author(s):  
Andreas Hecht
Keyword(s):  
Risk Management ◽  
Interest Rate ◽  
Cash Flow ◽  
Fair Value ◽  
Separate Analysis ◽  
Content Type ◽  
Financial Firms ◽  
Exposure Data ◽  
Before And After ◽  
Data Granularity

Purpose This paper aims to identify how non-financial firms manage their interest rate (IR) exposure. IR risk is complex, as it comprises the unequal cash flow and fair value risk. The paper is able to separate both risk types and investigate empirically how the exposure is composed and managed, and whether firms increase or decrease their exposure with derivative transactions. Design/methodology/approach The paper examines an unexplored regulatory environment that contains publicly reported IR exposure data on the firms’ exposures before and after hedging. The data were complemented by indicative interviews with four treasury executives of major German corporations, including two DAX-30 firms, to include professional opinions to validate the results. Findings The paper provides new empirical insights about how non-financial firms manage their interest rate exposure. It suggests that firms use hedging instruments to swap from fixed- to floating-rate positions predominantly in the short-to medium-term, and that 63 [37] per cent of IR firm exposure are managed using risk-decreasing [risk-increasing/-constant] strategies. Practical implications Interviewed treasury executives suggest that the advanced disclosures benefit various stakeholders, ranging from financial analysts and shareholders to potential investors through more meaningful analyses on firms’ risk management activities. Further, the treasury executives indicate that the new data granularity would enable firms to carry out unprecedented competitive analyses and thereby benchmark and improve their own risk management. Originality/value The paper is the first empirical study to analyze the interest rate activities of non-financial firms based on actually reported exposure data before and after hedging, rather than using proxy variables. In addition, the new data granularity enables a separate analysis of the cash flow and fair value risk to focus on the non-financial firms’ requirements.

Issues on the application of IFRS9 and fair value measurement for Islamic financial instruments

2016 ◽  
Vol 7 (3) ◽  
pp. 202-214 ◽  
Author(s):  
Zurina Shafii ◽  
Abdul Rahim Abdul Rahman
Keyword(s):  
Cash Flow ◽  
Fair Value ◽  
Financial Assets ◽  
Financial Instruments ◽  
Fixed Rate ◽  
Accounting Standard ◽  
Content Type ◽  
Starting Point ◽  
Fair Value Measurement ◽  
Value Measurement

Purpose This paper aims to examine some issues in IFRS9 with regards to classification and measurement of Islamic financial assets. In addition, the paper discusses the Shariah concerns on the use of fair value to measure financial assets. Design/methodology/approach This paper adopts qualitative method via the study of documents and textual analysis of Shariah opinions of scholars and relevant accounting standards. Findings The paper found that the classification and measurement of equity-based Islamic financial assets do not fit into the “default” classification category of amortised cost, as the future cash flow receivable does not constitute solely the payment of principal and interest (fixed rate payment). With regards to fair value measurement, Shariah concern arises during the adoption of fair value at Level 2 (reference of asset values from input other than quoted prices in active markets) and Level 3 (use of discounted cash flow method to arrive to asset valuation) because of the existence of in uncertainty or gharar as compared to Level 1 (fair value referred to quoted prices of similar assets). Practical implications Findings of the paper provide a starting point for a debate and extensive research on issues related to classification and measurement of Islamic financial assets and the use of fair value as a method of subsequent revaluation of Islamic financial assets. The Shariah analysis in the paper is useful for International Accounting Standard Board to engage with Islamic financial institutions and local accounting standard setters to reflect the unique nature of Shariah-compliant financial instruments. The paper serves as a basis to devise technical solutions to address accounting and reporting issues of Islamic financial instruments. Originality/value The paper offers Shariah analysis on the issue of classification, measurement and impairment model for Islamic financial assets. The paper is considered as the first paper that examines areas of possible tensions when applying IFRS9 to the accounting of Islamic financial assets. In addition, the paper has contributed to the literature in Islamic accounting and auditing.

scholarly journals THE EFFECT OF FAIR VALUE IMPLEMENTATION ON CASH FLOW FORECASTING (CASE STUDY: BANKING COMPANY LISTED IN INDONESIAN STOCK EXCHANGE YEAR 2014-2015)

AKUNTABILITAS ◽  
2019 ◽  
Vol 11 (1) ◽  
pp. 59-70
Author(s):  
Riesa Morita Yuliasari ◽  
Mukhtaruddin Mukhtaruddin ◽  
Tertiarto Wahyudi
Keyword(s):  
Cash Flow ◽  
Quantitative Research ◽  
Stock Exchange ◽  
Secondary Data ◽  
Sampling Technique ◽  
Fair Value ◽  
Financial Statement ◽  
Historical Cost ◽  
Cash Flow Forecasting

This study has one main objectives; to investigate about the significant effect of fair value implementation in forecasting cash flow on Banking Company in Indonesia. The methodology used in this research is quantitative research, so the data are collected from secondary data by using purposive sampling technique of Banking Company’s Financial Statement uploaded in Indonesian Stock Exchange which related to this research. The number of sample in this research are 36 financial statement of Banking Company in Indonesia for year 2014 and 2015 consist of 18 financial statement that implement fair value and 18 financial statement that still implement historical cost. The results of this study show that the implementation of fair value does significantly influence cash flow forecasting of Banking Company in Indonesia.

scholarly journals The FASBs Concepts Statement On Cash Flows And Present Value

2011 ◽  
Vol 19 (4) ◽  
Author(s):  
Stanley Martens ◽  
Thomas Berry
Keyword(s):  
Cash Flow ◽  
Accounting Standards ◽  
Fair Value ◽  
Cash Flows ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Present Value ◽  
Numerical Examples ◽  
Flow Information

In February 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements.  In this document the FASB asserts without proof that a present value computation along its lines will provide a good estimate of the fair value of an asset or liability.  Using numerical examples provided by the FASB, we attempt to construct arguments in support of the FASB’s claim.  We find that such arguments require strong and not at all obvious assumptions about players in hypothetical markets.

scholarly journals Aspectos a considerar en los cálculos de efectividad de una cobertura de valor razonable en donde el swap de tasa de interés intercambia una tasa flotante por otra tasa flotante

2017 ◽  
Vol 6 (12) ◽  
Author(s):  
Miguel A. García ◽  
Heriberto G. Martínez ◽  
Jesús G. Cruz
Keyword(s):  
Key Words ◽  
Fair Value ◽  
Financial Instruments ◽  
Hedge Accounting ◽  
Valuation Effect

Key words: Bulletin C-10, effectiveness testing, hedge accounting, swapsAbstract. This article analyzes the hedge accounting of fair value hedge on a variable-tovariable swap. Following the effectiveness valuation procedure established in Bulletin C-10 “Derivative Financial Instruments and Hedge Activities” under Mexican GAAP will generate distorted effectiveness outcome even though the critical terms between the hedge item and the hedging instrument are the same in all aspects. To show this effect we present ahypothetic example for a fair value hedge relationship LIBOR-TIIE. Our conclusion is that this distortion is due to a valuation effect known as “pull to par” especially when the coupon reset dates of the hedge item and the hedging instrument does not match with the valuation date. Finally, it propones alternative ways to book this kind of transactions that eliminate thetemporal distortion that this pull to par effect generates.Palabras claves: Boletín C-10, contabilidad de coberturas, evaluación de efectividad, swapsResumen. En este artículo se analiza que la contabilización de una cobertura de valor razonable de un swap de tasa de interés con intercambios de variable por variable, siguiendo el procedimiento de evaluación de efectividad establecido en el Boletín C-10 “Instrumentos Financieros Derivados y Operaciones de Cobertura” de las Normas de Información Financieras, generará resultados de efectividad distorsionados aún y cuando los términos críticos entre la Posición Primaria sujeta a cobertura y el Instrumento Financiero Derivado (IFD) utilizado sean iguales. Para demostrar este efecto se desarrolla un ejemplo hipotéticode una cobertura de valor razonable en donde se intercambian tasas LIBOR por TIIE. Se comenta que esta distorsión se genera debido a un efecto conocido como “pull to par” especialmente cuando la fecha de valuación no coincide con la fecha de corte de cupón del

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