Cash flow hedge definition
/What is a Cash Flow Hedge?
A cash flow hedge uses a hedging instrument to lock down specific cash inflows or outflows that would otherwise have been subject to the variability in market movements. It is possible to only hedge the risks associated with a portion of an asset, liability, or forecasted transaction, as long as the effectiveness of the related hedge can be measured.
Accounting for a Cash Flow Hedge
The accounting for a cash flow hedge for the hedging item is to recognize the effective portion of any gain or loss in other comprehensive income, and recognize the ineffective portion of any gain or loss in earnings. The accounting for a cash flow hedge for the hedged item is to initially recognize the effective portion of any gain or loss in other comprehensive income. Reclassify these gains or losses into earnings when the forecasted transaction affects earnings.
A key issue with cash flow hedges is when to recognize gains or losses in earnings when the hedging transaction relates to a forecasted transaction. These gains or losses should be reclassified from other comprehensive income to earnings when the hedged transaction affects earnings.
Cash flow hedge accounting should be terminated at once if any of the following situations arises:
The hedging arrangement is no longer effective
The hedging instrument expires or is terminated
The organization revokes the hedging designation