Case 3 Giant Manufacturing Page 1
Objectives of the Case
This case gives students an opportunity to determine whether the two net
investment hedges described in the case facts appropriately qualify for hedge
designat
...
Case 3 Giant Manufacturing Page 1
Objectives of the Case
This case gives students an opportunity to determine whether the two net
investment hedges described in the case facts appropriately qualify for hedge
designation in accordance with the requirements in ASC 815-20.
Applicable Professional Pronouncements
FASB Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)
ASC 815, Derivatives and Hedging (ASC 815)
ASC 815-20, Derivatives and Hedging: Hedging — General (ASC 815-20)
ASC 815-35, Derivatives and Hedging: Net Investment Hedges (ASC 815-
35)
Note that capitalized terms that are not defined herein are defined within the case facts.
Note: On August 28, 2017, the FASB issued ASU 2017-12, which is designed to more
closely align the results of cash flow and fair value hedge accounting with risk
management activities through changes to both the designation and measurement
guidance for qualifying hedging relationships and the presentation of hedge results in the
financial statements. The amendments in ASU 2017-12 address specific limitations in
current U.S. GAAP by (1) expanding hedge accounting for both nonfinancial and
financial risk components and (2) refining the measurement of hedge results to better
reflect an entity’s hedging strategies. Thus, the amendments will enable an entity to more
faithfully report the economic results of hedging activities for certain fair value and cash
flow hedges and will avoid mismatches in earnings by allowing for greater precision
when measuring changes in fair value of the hedged item for certain fair value hedges. In
addition, when an entity (1) aligns the timing of recognition of hedge results with the
earnings effect of the hedged item for cash flow and net investment hedges and (2)
includes the earnings effect of the hedging instrument in the same income statement line
item in which the earnings effect of the hedged item is presented, both the results of and
cost of executing the entity’s hedging program will be more visible to users of financial
statements.
For public business entities, the amendments in ASU 2017-12 are effective for fiscal
years beginning after December 15, 2018, and interim periods within those fiscal years.
Early application is permitted in any interim period after issuance of the ASU (August
28, 2017). As stated in the case facts, since Giant is a public company, it has adopted this
Case 3 Giant Manufacturing Page 2
Question 1
Define the type of hedging arrangement that Giant is attempting to use with the CrossCurrency Hedging Instrument and EUR Debt-Hedging Instrument to hedge against
changes in foreign currency exposure. In other words, are these cash flow hedges, fair
value hedges, or net investment hedges?
Solution
These are net investment hedges, also referred to as hedges of a net investment in a
foreign operation. An entity would designate a net investment hedge if its objective is to
manage risk associated with foreign currency gains and losses that result in recording
currency translation adjustments within other comprehensive income because of an
investment in a foreign subsidiary. The objective of a net investment hedge is to protect a
designated monetary amount of Giant’s net investment in subsidiaries whose functional
currency (in this case, EUR) is other than that of Giant’s functional currency (in this case,
USD) against the risk of adverse changes in the USD/EUR exchange rate.
ASC 815-20-25-66 specifically permits this type of hedging relationship and states, in
part:
A derivative instrument or a nonderivative financial instrument that may give rise to a
foreign currency transaction gain or loss under Subtopic 830-20 can be designated as
hedging the foreign currency exposure of a net investment in a foreign operation
provided the conditions in parag
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