Practice Test 9

A for-profit manufacturer enters into a 12-month forward contract to purchase a commodity used in production. The forward contract requires net cash settlement and is not designated as a hedging instrument under FASB ASC 815. At quarter-end, the forward contract has a positive fair value to the manufacturer. Which is the appropriate accounting treatment for this derivative instrument?

A U.S.-based for-profit manufacturer has a forecasted purchase of €5,000,000 of equipment in 6 months and is exposed to variability in U.S. dollar cash flows due to changes in the EUR/USD exchange rate. On January 1, the company enters into a 6-month forward contract to buy €5,000,000 to hedge the forecasted purchase, and it formally documents the hedging relationship and its risk management objective in accordance with FASB ASC 815; it also expects the hedge to be highly effective. Which is the appropriate accounting treatment for this derivative instrument?