Hedge Accounting and Weather Derivatives Explained

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Guidance on Hedge Accounting: The FASB Codification explains weather derivatives and how to account for them in ASC 815-45. According to ASC 815-45-20, (2013) a weather derivative is described as “a forward-based or option-based contract for which settlement is based on a climatic or geological variable.” Cash flow hedging is the method recommended in regard to accounting for weather derivatives, There are two types of hedging strategies to be used. According to FASB ASC 815-30, (2010) cash flow hedges relate to forecasted transactions where the effective portions of the hedge is initially reported in other comprehensive income and are later reclassified into earnings any portion of the hedge that is ineffective is reported currently in earnings. Fair value …show more content…

This will ensure effective application of the hedging strategy. Such factors as, the physical conditions of the growing crops, production and harvesting costs and the weather predictions for the next few months, should be put into consideration. This helps in being realistic about the value of the produce. Whenever the hedge accounting is implemented properly, it assists in offsetting any damages from fluctuations produce price. The company should strive to control their resale price as this is within their ability to control. This is mainly because they purchase the produce for resale and any fluctuation in the purchase price will affect their sales price. With the purchase order system, the company creates a contract with the farmers. With a Purchase Order, the farmer agrees and guarantees to sell a set quantity of farm produce to Thomas Foods for an agreed price over an agreed period of time. The system allows the company to hedge against price increases and as well ensure that they have a constant supply of farm produce to supply to their customers at all

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