- The documented hedging objectives are supported by the written risk manage-
ment strategy. - AOCI related to hedges of sales and of inventory are reclassed to sales and cost
of goods sold, respectively. FAS 133 does not require a specific P&L item for
such reclassification, but it must be disclosed in the footnotes (Paragraph 44 and
K4). - All forecasts are assumed to be probable. Auditors may require additional doc-
umentation supporting that assumption. - At the end of each sample hedge documentation below, there is a section to be
filled in that will cause the hedge to comply with the IRS requirements. While
not required by FAS 133, nearly all hedges by U.S. entities must be documented
for IRS purposes. IRS documentation includes nearly all of the same elements
that FAS 133 requires, but there are additional requirements depending on the
hedge’s tax regime. Best practice is to use the same documentation for both
book and tax, appending the necessary IRS documentation at the end of the 133
documentation.
A. DOCUMENTATION FOR FORWARD CONTRACT FOREIGN CURRENCY CF
HEDGE OF FUTURE SALES
Documentation preparation date: January 2, 200X
Risk Management Objective and Strategy
General International, Inc. (HedgeCo), a U.S. dollar (USD) functional currency en-
tity, forecasts that it will have intercompany sales to General International Japan K.K
(Buyer) in April 200X in the amount of Japanese yen (JPY) 3,300,000,000. These in-
tercompany sales are invoiced in JPY and therefore HedgeCo is exposed to variabil-
ity in expected future USD cash flows as a result of foreign currency movements be-
tween the JPY and the USD.
In accordance with HedgeCo’s risk management strategy, HedgeCo’s risk man-
agement objective is to reduce the variability in functional currency-equivalent cash
flows from forecasted nonfunctional currency intercompany sales that are caused by
changes in foreign currency exchange rates. This objective is met by entering into a
foreign currency forward contract to sell the Japanese yen forward and buy US dol-
lars at a specific rate on the last day of the month of the forecasted intercompany sale.
Type of FAS 133 Hedge
Cash flow.
Hedged Item
For this Hedge Relationship, HedgeCo designates as the hedged item the first JPY
3,300,000,000 of its forecasted JPY-denominated intercompany sales to Buyer dur-
ing April 200X. Based on historical trends (see attached), the amount of forecasted
Hedged Item is probable to occur.
Hedged Item’s Hedged Risk
For this Hedge Relationship, HedgeCo designates the above Hedged Item’s Hedged
Risk as the risk of changes in the net present value of Hedged Item’s functional-cur-
19 • 20 FAS 133: ACCOUNTING FOR DERIVATIVE PRODUCTS