Hedge Accounting Basics: Fair Value, Cash Flow Hedges & Effectiveness Testing

What you'll build

What you will be able to do

Each lab ends with a concrete result that you build yourself and the checker confirms, cell by cell.

• Show Strandvik Instruments's board how an economically perfect FX hedge still makes quarterly profit jump around when hedge accounting is not applied, and how much calmer profit looks with it.
• Book a year of Strandvik Instruments's fair value hedge: the swap's gains and losses, the matching adjustment to the bond, the small net ineffectiveness and the bond's adjusted carrying amount.
• Follow Strandvik Instruments's FX forward for a forecast EUR 4m purchase from trade date to sale of the components: fair value, OCI reserve, journal entries and the hedged cost that finally reaches profit.
• Apply the cumulative lower-of test to Strandvik Instruments's commodity cash flow hedge each quarter and split the derivative result into OCI and profit, including the reversal when an over-hedge turns into an under-hedge.
• Test Strandvik Instruments's interest rate hedge over twelve months with the period dollar-offset ratio, the cumulative dollar offset and a regression (SLOPE and RSQ), and see why one tiny month can fail a period test.
• Size Strandvik Instruments's futures hedge for 2,400 t of a special alloy with a regression hedge ratio, then rebalance when the relationship weakens in the second half of the year.
• Show how a EUR 15m loan offsets the translation differences on Strandvik Instruments's EUR 20m German subsidiary in OCI, and what goes to profit once the loan is bigger than the net assets.
• Build Strandvik Instruments's quarterly roll-forward of the cash flow hedge reserve, the full-year column, a waterfall chart of the year and a share-of-nominal column for the hedge disclosure table.