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Accounting for Fair Value Hedges | Steps | Journal Entries - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to channel
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by clicking the bell ican today we have a
topic with us is accounting for fair
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value hedges and it is accounting
accounting basic thing that we are
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trying to understand so let's try and
understand in detail format now the
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accounting for the fair value hedges you
know a fair value Hedge of the exposure to
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changes in the fair value of any asset
or you know liability or any such items
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that is attributable to the particular
risk and it can result in either profit
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or loss so a fair value has hedged
results in the fixed value item
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now the fair value Hedge pertains to you
know a fixed rate returns or the fixed
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value items and the basic step involves
is you know you need to first determine
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the fair value of both the hedged item
and the hedging instrument okay used on
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the date of the reporting or financial
statement so if there is a change in the
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fair value of the hedge instruments
recognize the profit and loss in the
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books of accounts second if if there is
a change in the fair value you know
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hedge instrument you need to record any
changes lastly recognize the hedging
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gain or loss on the hedged items as in
the carrying amount so how does the
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accounting part goes let's say you know
the company fair has an asset with its
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current fair value let's say it's
standing at $2000 and the
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management is concerned that the fair
value of the hedge will will go down to
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let's say 1900 so this will
result a loss to the company so to
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offset the loss the company and does
into the offsetting position through
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let's say a derivative contract which
also has a fair value of let's say
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2000 now since this is an offsetting
position its fair value will move in the
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opposite direction as that of the hedged
item so the time of the closure is books
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the following scenario are possible as
you know now there is a case one where
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there is a decrease in the fair value of
the hedged item and simultaneous
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increase in the fair value of the
of setting hedged instruments over here
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there is a net loss in the first case
when the value of the hedged item is
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1,92,000 the gain or loss is $80 so the
value of the hedged item is $2060 and
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the gain and loss is $60 net gain is
$80 and $60 that is negative $20 so in this
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fashion all other calculations are done
in the second case there is an increase
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in the fair value of the hedged item and
simultaneous decrease in the fair value
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of the hedged item of the offsetting
hedged instrument so same calculation
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goes around just a little change now I
wanted to take you to the journal entry
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part well what we'll go in so first you
know a loss let's say there is a loss on
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the hedged on the hedging the item of
the reporting date over here they'll be
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debit the loss to loss on the hedged
item account ok so this will have an
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effect on the what we call as the profit
and loss account and it will reduce the
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profit of the company now over here
there'll be a credit the hedged account
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or the hedged item since this is an
asset and the value of the asset will go
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down and this will affect the financial
position that is the balance sheet of
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the company the second if there is a
gain what if there is a gain in the
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hedging item of the reporting period so
again we'll debit the hedged item since
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this is an asset and the value of the
asset will go up and this will affect
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the financial position that's the balance sheet of the company now this will
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have an effect on the profit and loss
account and there will be an increase in
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the profit of the company ok right this
was in case of the gain part now how
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about in case of the hedging instrument
where there is a loss on the hedged
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instrument account what is this case
okay and if in this scenario if there is
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a loss in the hedging instrument of the
reporting period how things will go well
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in this particular scenario this will
have an effect
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the profit and loss account and it will
reduce the profit of the company so if
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you go over here you see that you know
they'll on the credit hedged instrument
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since you know will be hedging will be
crediting the hedge instrument because
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there is an asset and the value of the
asset will go down and this will affect
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the financial position of the company
that is the balance sheet of the company
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now if in this scenario if gain occurs
gain in the hedging instrument of the
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reporting period then we will credit the
hedged item since this is an asset and
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the value of the asset will go up and
this will affect the financial position
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that is the balance sheet of the company
and this will have an effect on the
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profit and loss account and and there
will be increase in the profit of the
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company so the net effect if you see net
effect of both hedging items and the
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hedging instruments the net loss on
account on the date of the reporting
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period will decrease the net loss will
reduce or will decrease the overall
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profit of the company and the net
reduction in the net asset of the
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company second in case of the net gain
of the reporting there will be a net
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increase in the net assets of the
company and the net gain will increase
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the overall profit of the company so
that's it for this particular topic of
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accounting furnace so that's it for this
particular topic if you have learned and
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