What is Hedge of a firm commitment?
In short
A firm commitment is a binding agreement with a fixed price, quantity and timing, such as an order to buy equipment for a set amount of euros. Its exposure to price or exchange rate changes can be hedged as a fair value hedge.
Key takeaways
- Changes in the commitment's fair value are recognized as an asset or liability, offsetting the derivative.
- When the purchase occurs, that amount adjusts the carrying amount of the item acquired.
- Foreign currency risk on a firm commitment can be hedged as a cash flow hedge instead.
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 with variable-rate debt enters into an interest rate swap to pay fixed and receive variable, properly designated and documented as a hedge. Where are changes in the swap's fair value reported?