On November 15, 2013, Nizker Ltd., a Canadian company that follows IFRS, entered into a firm commitment to purchase inventory from a European supplier for €250,000, which will be paid in euros upon delivery on January 31, 2014. Nizker hedges this commitment by purchasing a €250,000 term deposit on November 15, 2013. The hedge is designated as a cash flow hedge and Nizker will apply hedge accounting. The exchange rate on November 15, 2013, was €1 = C$1.33. At Nizker’s year end, December 31, 2013, the exchange rate was €1 = C$1.30. At January 31, 2014, the exchange rate was €1 = C$1.35.
(a) Prepare journal entries to record the events from November 15, 2013, to December 31, 2013.
(b) Discuss the effectiveness of this euro term deposit as a hedge against foreign currency risk.
(c) Explain how using hedge accounting is superior to not using hedge accounting in this situation with respect to the financial statements’ portrayal of the company’s currency risk exposure.