IDEAS home Printed from https://ideas.repec.org/a/eee/joaced/v29y2011i4p284-294.html
   My bibliography  Save this article

Reducing reporting risk: Designating foreign currency forward contracts as cash flow hedges

Author

Listed:
  • Rambo, Robert G.
  • Main, Daphne
  • Beaubien, Louis

Abstract

We present an example that compares the effects on earnings of designating a foreign currency forward contract as either a cash-flow or fair-value hedge of a foreign currency denominated receivable. Entities engaging in exchange transactions not denominated in their functional currency frequently enter into foreign currency forward contracts in order to mitigate their foreign exchange rate risk exposure. The aggregate effect on earnings of the transaction gain or loss on the foreign currency receivable and the gain or loss on the forward contract is known on the date the forward contract is initiated. The effect on each period’s earnings during the term of a forward contract designated as a cash-flow hedge is also known on the date the contract is initiated; whereas the effect on each periods’ earnings from a fair-value hedge cannot be determined until the respective balance sheet dates. Therefore, designating forward contracts as cash-flow hedges may suppress volatility in reported earnings compared to designating forward contracts as fair-value hedges. In addition, the reporting risk (the amount of uncertainty surrounding the pending measure of an item to be reported in the financial statements) is lower when a forward contract is designated as a cash-flow hedge relative to designating it as a fair-value hedge. This suggests foreign currency forward contracts designated as cash-flow hedges are more consistent with the purpose of hedge accounting: to mitigate the effects on earnings of applying different measurement criteria for the hedge and the hedged item.

Suggested Citation

  • Rambo, Robert G. & Main, Daphne & Beaubien, Louis, 2011. "Reducing reporting risk: Designating foreign currency forward contracts as cash flow hedges," Journal of Accounting Education, Elsevier, vol. 29(4), pages 284-294.
    • Handle: RePEc:eee:joaced:v:29:y:2011:i:4:p:284-294
    DOI: 10.1016/j.jaccedu.2012.03.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0748575112000085
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jaccedu.2012.03.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Francis, J & Schipper, K, 1999. "Have financial statements lost their relevance?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 37(2), pages 319-352.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Naveed, Hafiz Muhammad & HongXing, Yao & Memon, Bilal Ahmed & Ali, Shoaib & Alhussam, Mohammed Ismail & Sohu, Jan Muhammad, 2023. "Artificial neural network (ANN)-based estimation of the influence of COVID-19 pandemic on dynamic and emerging financial markets," Technological Forecasting and Social Change, Elsevier, vol. 190(C).
    2. Apostolou, Barbara & Dorminey, Jack W. & Hassell, John M. & Watson, Stephanie F., 2013. "Accounting education literature review (2010–2012)," Journal of Accounting Education, Elsevier, vol. 31(2), pages 107-161.
    3. Arcelus, F.J. & Gor, Ravi & Srinivasan, G., 2013. "Foreign exchange transaction exposure in a newsvendor setting," European Journal of Operational Research, Elsevier, vol. 227(3), pages 552-557.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Inès Ben Cheikh & Hédi Noubbigh, 2019. "The Effect of Intellectual Capital Drivers on Performance and Value Creation: the Case of Tunisian Non-financial Listed Companies," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 10(1), pages 147-167, March.
    2. Beaver, William H. & McNichols, Maureen F. & Wang, Zach Z., 2020. "Increased market response to earnings announcements in the 21st century: An Empirical Investigation," Journal of Accounting and Economics, Elsevier, vol. 69(1).
    3. Khalifa, Mariem & Trabelsi, Samir & Matoussi, Hamadi, 2022. "Leverage, R&D expenditures, and accounting conservatism: Evidence from technology firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 285-304.
    4. Frankel, Richard & Kothari, S.P. & Weber, Joseph, 2006. "Determinants of the informativeness of analyst research," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 29-54, April.
    5. Anna Maria Biscotti & Eugenio D’Amico, 2019. "Does Equity Market Differently Perceive IC Management and Disclosure Behaviours?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 10(2), pages 756-775, June.
    6. Erlend Kvaal, 2018. "Discussion of ‘Making Deferred Taxes Relevant’," Accounting in Europe, Taylor & Francis Journals, vol. 15(2), pages 231-241, May.
    7. Lam, Kevin C.K. & Sami, Heibatollah & Zhou, Haiyan, 2013. "Changes in the value relevance of accounting information over time: Evidence from the emerging market of China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 9(2), pages 123-135.
    8. Joliet, Robert & Muller, Aline, 2016. "Are foreign earnings disclosures value-relevant?," Research in International Business and Finance, Elsevier, vol. 37(C), pages 170-183.
    9. Waleed Khalid & Kashif Ur Rehman & Muhammad Kashif, 2019. "The Impact of Merger and Acquisition Firms on Stock Market Bubble," Global Regional Review, Humanity Only, vol. 4(1), pages 335-342, March.
    10. Pagach, Donald P. & Warr, Richard S., 2020. "Analysts versus time-series forecasts of quarterly earnings: A maintained hypothesis revisited," Advances in accounting, Elsevier, vol. 51(C).
    11. Melik Ertugrul & Ali Coskun, 2019. "DoesS Recycling Contribute To Accounting Quality," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 33(2), pages 1-18.
    12. Waseemullah & Isamil Safi & Anam Shehzadi, 2015. "Earnings Management and Firm Performance: A Case of Karachi Stock Exchange Listed Firms in Pakistan," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 3(6), pages 278-285, June.
    13. Lorena Mitrione & George Tanewski & Jacqueline Birt, 2014. "The relevance to firm valuation of research and development expenditure in the Australian health-care industry," Australian Journal of Management, Australian School of Business, vol. 39(3), pages 425-452, August.
    14. Stephen Baginski & John Hassell & Michael Kimbrough, 2008. "Macro information environment change and the quality of management earnings forecasts," Review of Quantitative Finance and Accounting, Springer, vol. 31(3), pages 311-330, October.
    15. Goncharov, Igor & Werner, Joerg R. & Zimmermann, Jochen, 2009. "Legislative demands and economic realities: Company and group accounts compared," The International Journal of Accounting, Elsevier, vol. 44(4), pages 334-362, December.
    16. Clarkson, Peter M. & Walker, Julie & Nicholls, Shannon, 2011. "Disclosure, shareholder oversight and the pay–performance link," Journal of Contemporary Accounting and Economics, Elsevier, vol. 7(2), pages 47-64.
    17. Elizabeth Demers & Philip Joos, 2007. "IPO Failure Risk," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 45(2), pages 333-371, May.
    18. IOAN-BOGDAN ROBU & Costel ISTRATE & Mihai CARP & CRISTIAN POPESCU & MIHAELA-ALINA ROBU, 2016. "The Value Relevance Of Financial Information Under The Influence Of Country Risks. The Case Of The Indian Listed Companies," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 18, pages 77-93, December.
    19. Oliver Binz & John R. Graham, 2022. "The Information Content of Corporate Earnings: Evidence from the Securities Exchange Act of 1934," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 60(4), pages 1379-1418, September.
    20. Chen, Han-Chung & Lee, Yen-Jung & Lo, Sheng-Yi & Yu, Yong, 2021. "Qualitative characteristics of non-GAAP disclosures and non-GAAP earnings quality," Journal of Accounting and Economics, Elsevier, vol. 72(1).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:joaced:v:29:y:2011:i:4:p:284-294. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-accounting-education .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.