FASB Codification Project

Due Date: Sunday May $5,$ end of day

ALL RESPONSES MUST TYPEWRITTEN

Instructions: Read the case below and answer the $3$ questions. Do not rewrite the case or rewrite the questions. Simply number your responses to correspond with the questions.

Signal Corp is a US manufacturer of auto parts with branch operations in France. On January $1,2024,$ Signal wishes to use a foreign currency option to hedge a $20,000,000$ euro denominated accounts payable that is due in four years. Signal plans to use fair value hedge accounting. Over the subsequent $4$ quarters the following are the changes in the fair value of the payable and the fair value of the foreign currency option hedge.

Quarter ended March $31,2024$: Euro payable increases by $$400,000$

Option hedge declines by $$350,000$

Quarter ended June $30,2024$: Euro payable decreases by $$500,000$

Option hedge increases by $$400,000$

Quarter ended Sept. $30,2024$ Euro payable decreases by $$800,000$

Option hedge increases by $$700,000$

Quarter ended Dec. $31,2024$: Euro payable increases by $$200,000$

Option hedge decreases by $$100,000$

Answer the following questions:

$1.$ Structure the appropriate fair value hedge using an FX option. Your answer must state whether Signal is purchasing or selling an option, what is the expiration date of the option as well as whether it is an option to purchase euros and sell US dollars or an option to purchase US dollars and sell euros.

$2.$ Identify by codification reference, e$.$g$.,$ xxx$-$xx$-$xx$-$xx$,$ and attach AND HIGHLIGHT the appropriate section$($s$)$ of the FASB codification that describe the alternate criteria that can be used to determine at December $31,2024$ whether or not this has been an effective fair value hedge

$3.$ Using one of the alternate criteria in your answer to #$2$ above, state your conclusion as to whether this is an effective hedge, meeting the FASB criteria. You must include a computation to support your conclusion. Indicate whether any further assumptions are necessary to answer the problem.