A forward contract used as a cash flow hedge will be recorded as an asset if
A)the holder is expecting to receive a payment as a result of the contract.
B)the holder is accounting for the hedged instrument as a fair value hedge.
C)the holder is hedging the net investment in a foreign entity.
D)the holder is using the alternate accounting method and deferring all gains or losses from the hedge.

Question

Quizplus · Accepted Answer

A forward contract used as a cash flow hedge is intended to help the holder manage the risk associated with receiving or making a payment. Therefore, if the holder is expecting to receive a payment as a result of the contract, it is recorded as an asset on the balance sheet. The asset represents the fair value of the contract and is adjusted for changes in the fair value of the contract until the hedged cash flows occur. Option B is incorrect as fair value hedges are used to manage the risk associated with changes in the fair value of a recognized asset or liability, not the risk associated with cash flows. Option C is incorrect as the net investment hedge is used to manage the risk associated with fluctuations in currency exchange rates on the net investment in a foreign entity. Option D is incorrect as there is no such thing as an alternate accounting method for cash flow hedges.

A Forward Contract Used as a Cash Flow Hedge Will