Part 2 book “Advanced accounting’’ has contents: Accounting for derivatives and hedging activities, foreign currency financial statements, segment and interim financial reporting, partnership liquidation, corporate liquidations and reorganizations, an introduction to accounting for state and local governmental units, and other contents. | cHApTER 12 Derivatives and Foreign currency: concepts and common Transactions T LEARNING OBJEcTIVES his chapter covers the economics of derivatives and foreign currency transactions and how firms manage the risks they face. The next chapter covers hedge accounting, which will include the accounting for derivatives used for hedging risks. We first introduce some concepts about risk and how firms can manage risk with derivatives. Then we describe different types of derivatives. Finally, we discuss concepts and transactions involving foreign currency–denominated transactions. DE R I VATIVES LEARNING OBJECTIVE Definitions Derivative is the name given to a broad range of financial securities. Their common characteristic is that the derivative contract’s value to the investor has a direct relationship to fluctuations in price, rate, or some other variable that underlies it. Using a derivative contract can limit businesses’ exposure to price or rate fluctuations. One party to the contract, in effect, bets that the underlying price or rate will move in the opposite direction to what the other party is expecting. A party trying to control its economic rate or price change risk is engaging in a derivative, or hedge contract. Contract structures and the accounting for such contracts vary across the types of risk managed. Interest rates, commodity prices, foreign currency exchange rates, and stock prices are the most common types of price and rate risks that companies hedge. For example, Starbucks faces a variety of risks including interest rate risk, commodity price fluctuation, and foreign currency fluctuation. Because Starbucks forecasts future cash flows and earnings based on future rates and prices, it enters into derivative contracts to manage the risk of those future By entering into these types of agreements, Starbucks locks in exchange rates, interest rates, and commodity prices, reducing the effects of future changes in
