US-CN Companies & Securities Law Assignment

Accounting for Derivatives and Hedging Activities 1. Explain the objective of hedge accounting and how this objective should improve the transparency of financial statements. Hedge accounting refers to accounting designed to record changes in the value of the hedged item and the hedging instrument in the same accounting period. This enhances transparency because the hedged item and hedging instrument accounting are linked. Prior to hedge accounting, the financial statement effect of the hedged item and hedging instrument were not linked. Since companies enter into hedges to mitigate risks, the accounting should reflect the effect of this strategy and should clearly communicate the strategy. The accounting and footnote disclosures required for derivatives attempt to do this. 2. Explain the differences between options, forward contracts, and futures contracts and the potential benefits and potential costs of each type of contract. An option is a contract that allows the ...