net investment hedge

Broad Transactions3

1. 815-35Net Investment Hedges815 Derivatives and Hedging

   ASC 815-35 governs the subsequent measurement of hedges of a net investment in a foreign operation (designated under 815-20). The effective portion of the gain or loss on the hedging derivative — or the foreign currency transaction gain or loss on a nonderivative hedging instrument such as foreign-currency debt — is reported the same way as a translation adjustment, i.e., in the cumulative translation adjustment (CTA) section of other comprehensive income (815-35-35-1). An entity elects either the spot method or the forward method to assess effectiveness and must apply that choice consistently to all derivative net investment hedges (815-35-35-4).

2. 830-20Foreign Currency Transactions830 Foreign Currency Matters

   ASC 830-20 governs how an entity accounts for transactions denominated in a currency other than its functional currency (foreign currency transactions). At the transaction date, each asset, liability, revenue, expense, gain, or loss is recorded and measured in the functional currency using the exchange rate in effect at that date (830-20-25-1; 830-20-30-1); thereafter, balances denominated in a foreign currency are remeasured at each balance sheet date at the current rate (830-20-35-2), with the resulting transaction gains and losses generally included in net income. Narrow exceptions—economic hedges of a net investment in a foreign entity and long-term-investment-nature intra-entity balances—are reported like translation adjustments in other comprehensive income (830-20-35-3).

3. 830-30Translation of Financial Statements830 Foreign Currency Matters

   ASC 830-30 governs how a reporting entity translates the financial statements of a foreign entity whose functional currency is not the reporting currency, when those statements are consolidated, combined, or accounted for under the equity method. Assets and liabilities are translated at the balance sheet date rate and revenues, expenses, gains, and losses at the rates on the dates recognized; the resulting translation adjustments go to other comprehensive income (accumulated as the cumulative translation adjustment, or CTA) rather than net income. The CTA is released into earnings only upon sale or complete or substantially complete liquidation of the investment in the foreign entity.