Fx gain/(loss) on hedges placed for US Company funding Mexican Sub (Maquilodora) in Peso

I have a question regarding Fx gain/(loss) on hedges placed for US Company funding Mexican Sub (Maquilodora) in Peso.

It appears Peso is received in at contract rate to Mexico but charge back to US for monthly maquiladora mark-up is at spot (based on Bank of Mexico daily rate). I am not sure what entry is being made each month to agree Mexico Interco AR AP to US Interco AR AP (when Mexico is being translated at spot), but am guessing offset is to CTA, whether directly or inadvertently. I did see entries in GL where an entry is being made for FASB 52 Calc (now ASC 830), wherein there is entry between CTA and Interco AR AP. I thought this might be true-up entry between two, but I see offset entry in US – wash between two would be nil

As the net Interco Rec’bl is never settled by the US with a payment to Mexico, nor do I think one is ever planned, it is probably most accurate to reflect the FX gains/losses over time as CTA (which I think is where they are ending up) as these are probably more accurately considered net investment gains/losses (similar to parent company investment) than as realized gains/losses based on current transactions.

Can anyone make a good argument for recording the realized fx gains/losses on P&L or support my reasoning for CTA (posting within equity on the balance sheet)???

Thanks!

Answers

Keith Perry Director of Global Accounting • October 3, 2012

John,

Here's a link describing how one expert (not me) handled it. It is OCI*, but has a CTA impact because of timing.
I'm assuming you are dealing with an OCI issue, as this sounds like a blanket hedge and not a hedge for particular transactions. My understanding is that per ASC 815, if you are hedging a particular committed event (such as a purchase you are making, or a committed sale, etc), the hedge becomes part of that transaction and is therefore a P&L event. Open hedges, because they are not part of particular transactions but relate to the nature of the international business as a whole, end up in OCI.

Link here on the CTA impact of OCI tracked hedges
http://hedgetrackers.com/resources/newsletters/april-2010-newsletter/advanced-asc-830-topic/

Sunil Thukral Controller/Technical Accounting Advisory/ SEC Reporting • October 4, 2012

You need to check is there is a hedge documentation and does this transaction qualify as a hedge for "accounting purposes". If this transaction qualifies as a hedge for accounting purposes, check out section on net investment hedges in ASC 815 (formerly FAS 133). For qualified accounting hedges, the FX change will be recorded in equity (via other comprehensive income (OCI) and stays in accumulated other comprehensive income (AOCI), within equity).

The amount from AOCI will be released to income statement when the investment is liquidated.

On the other hand, if the derivative does not qualify as a "hedge for accounting purposes", any change in the value of the derivative will flow through the income statement.

John Carter Sr Treasury Analyst • October 10, 2012

Hi Sunil / Hi Keith,

Thanks for your comments. We are going to recognize the realized fx on P&L and in OCI.

Bum Aga Unemployed • October 6, 2012

Hello to all, I would like to ask a question hedging too. If a EUR functional sub of a USD US parent buys from a GBP functional sub of the same USD parent and the transaction between them in USD, what is the right hedging to put in place to prevent P&L impact to EUR sub, and the impact to USD US parent?

Helen Kane President • October 23, 2012

I thought I would take a stab at addressing what appears to be a series of questions. : 1st: when a subsidiary records interco activity at different rates in P&L (daily rates in Mexico and an average rate at parent) the activity will not eliminate in consolidation without an adjustment. That adjustment would generally impact P&L. One party will have a non-functional currency balance that must be revalued. Once revalued it should eliminate in consolidations. That adjustment would generally hit P&L. You indicated that the interco is never paid down, in that case how does the Maquiladora receive the dollars from the parent (isn't that a payment?). The fact that the payment does not equal the peso value used to record the interco results in an FX gain/loss in the P&L. The only changes that belong in CTA relate to 1) long term intercos of an investment nature (I take that to mean a receivable by the parent) and 2) the amount of change in equity to bring the equity to the balance sheet rate (so all balances in consolidation) for a foreign functional subsidiary.

It sounds as if you have random amounts people don't know how to clear running to CTA. Likely not the correct accounting.

We offer beginning, intermediate and advanced classes in FAS52/ASC830 during the year. We will be posting our 2013 calendar in the next month. A review like this might be useful in looking at how you are addressing consolidation issues. We have an advanced training on Nov 9th:
http://hedgetrackers.com/edu_hedge_trackers_site_training. Some of the more advanced courses are easier to digest in person but are made available over the web.

I may have misunderstood your fact pattern. If so, the answers presented may be incorrect.

For Buma Aga:
The appropriate hedge would depend on your intention. If you want to eliminate gains and losses on a consolidated basis you would need a buy GBP/sell EUR forward. You could do this in almost any of the 3 entities (except that will cause tax issues). If you are concerned about taxes the EUR entity would Buy USD/Sell EUR and the GBP entity would Sell USD/Buy GBP. That gets all the gains and losses in the correct entity. If you wanted "special cash flow hedge accounting" you would need the EUR entity to designate the Buy USD/Sell EUR trade and the GBP entity to designate the Sell USD/Buy GBP. (Not necessary if just hedging payables/receivables already on the books.)

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Fx gain/(loss) on hedges placed for US Company funding Mexican Sub (Maquilodora) in Peso

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