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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Explain the accounting differences between a fair value hedge and a cash flow hedge.

To determine

Differentiate the accounting treatment for fair value hedge and a cash flow hedge.

Explanation

Fair value hedge: If the company uses any derivative to cover the risk due to fair value changes of asset, liability, or a commitment, the derivative is classified as fair value hedge. This type of hedge focusses to control the risk due to future price changes.

Cash flow hedge: A cash flow hedge is a hedge of anticipated transaction that is likely to occur in the future whose amount of transaction is not fixed. This hedge protects against the uncertainties that are caused by variable prices, costs, rates or terms that results in uncertain future cash flows...

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