How should discounts or premiums on forward contracts be treated if the derivative is hedging a foreign-currency-denominated asset?
A)They should be carried on the balance sheet until the contract is completed.
B)They should be included in income in the period the derivative is acquired.
C)They should be amortized over the life of the forward contract.
D)None of the above.

Question

Quizplus · Accepted Answer

Discounts or premiums on forward contracts used to hedge foreign-currency-denominated assets should be recorded on the balance sheet as a part of the asset's carrying amount. These discounts or premiums should then be amortized over the life of the underlying forward contract. This is because the purpose of the derivative is to lock in the exchange rate of the foreign currency, so any changes in the value of the derivative should be reflected in the carrying amount of the underlying asset. Including them in income in the period the derivative is acquired or carrying them on the balance sheet until the contract is complete would not be the correct treatment.

How Should Discounts or Premiums on Forward Contracts Be Treated