Monthly Financial Statement Procedure: Review of Recoverability of Cash Flow Hedge Losses
The monthly financial statement procedure should include a review of the recoverability of cash flow hedge losses. This review should assess the extent to which the losses are recoverable and determine if any adjustments are necessary. In addition, the review should evaluate the effectiveness of the hedging strategy in relation to the expected results.
Factors to Consider in Review
When evaluating the recoverability of cash flow hedge losses, there are a few important factors to consider:
- The nature of the hedging instrument or strategy being used
- The expected results of the hedge
- The time frame for the hedge
- The creditworthiness of the counterparty
If, after the review, it is determined that the losses are not recoverable, they should be recorded in the financial statements. The amount of the loss should be recorded as a debit to the income statement and a credit to the cash flow hedge reserve account. The cash flow hedge reserve account is a liability account that is used to record the gains and losses related to a hedge.
In addition to evaluating the recoverability of the losses, it is important to evaluate the effectiveness of the hedging strategy. This can be done by comparing the expected results of the hedge to the actual results and determining if the hedge was successful in managing the risk.
- What are the factors to consider when reviewing the recoverability of cash flow hedge losses?
- How should losses be recorded in the financial statements?
- What is the purpose of the cash flow hedge reserve account?
- What is the difference between a cash flow hedge and a fair value hedge?
- How is the effectiveness of a hedging strategy evaluated?
- What is the difference between a hedge and a speculation?
- What is the difference between hedge accounting and regular accounting?
- How can using derivatives help manage risk?
- What are the most common hedging instruments?
- What are the different types of hedging strategies?