Asked by Rosiee Adwoa on May 25, 2024
Verified
Current GAAP requires a company to recognize in its current net income any gain or loss from a change in the fair value of the derivative for a Fair Value Hedge Cash Flow Hedge I. yes yes II. yes no III. no no IV. no yes \begin{array}{lll}& \text { Fair Value Hedge}& \text { Cash Flow Hedge}\\\text { I. } & \text { yes } & \text { yes } \\\text { II. } & \text { yes } & \text { no } \\\text { III. } & \text { no } & \text { no } \\\text { IV. } & \text { no } & \text { yes }\end{array} I. II. III. IV. Fair Value Hedge yes yes no no Cash Flow Hedge yes no no yes
A) I
B) II
C) III
D) IV
Fair Value
This is the estimated price at which an asset or liability could be traded in an orderly transaction between market participants at the measurement date.
Net Income
The total profit of a company after all expenses, including taxes and operating costs, have been subtracted from total revenue.
Derivative
A financial instrument whose value is based on the performance of underlying assets such as stocks, bonds, or commodities.
- Outline the attributes and accounting practices associated with derivatives and hedges.
Verified Answer
CK
Carly KaminskiMay 31, 2024
Final Answer :
B
Explanation :
For a fair value hedge, GAAP requires the gain or loss from a change in the fair value of the derivative to be recognized in the current net income. For a cash flow hedge, the effective portion of the gain or loss is initially reported in other comprehensive income (OCI) and reclassified into earnings in the same period(s) during which the hedged transaction affects earnings. Therefore, the gain or loss from a change in the fair value of the derivative for a cash flow hedge is not immediately recognized in the current net income.
Learning Objectives
- Outline the attributes and accounting practices associated with derivatives and hedges.