In short
A forecasted transaction is an expected future transaction that isn't yet a firm commitment, such as planned purchases of raw materials next quarter. If it is probable, its cash flow risk can be hedged as a cash flow hedge.
Key takeaways
- Gains and losses on the hedging instrument go to other comprehensive income until the transaction affects earnings.
- If the transaction becomes probable not to occur, the amounts are reclassified to earnings immediately.
- Foreign currency risk on forecasted sales or purchases is commonly hedged this way.
Where it's tested
BAR: Derivatives & Hedge Accounting — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company hedges the variability in cash flows of a forecasted purchase of raw materials next year. This hedge is classified as a: