You have a client, Takashi Company, that is a U.S. company that has a foreign subsidiary. Your

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You have a client, Takashi Company, that is a U.S. company that has a foreign subsidiary. Your client and/or its subsidiary face a number of business risks: foreign exchange rate risk, interest rate risk, commodity price, credit risk, liquidity risk, and capital risk. Your client has not used hedging to reduce these risks in the past, but has started to think that using hedge accounting might be a good idea to help reduce the variability of income. As the company has grown and entered into more complex transactions, the effect of these risks on its income has increased. This is a concern, as your client is considering an IPO in the near future. The Board of Directors of your client knows very little about the requirements that must be met to use hedge accounting or the effect of the accounting on the financial statements. They have asked your firm to provide them with answers.

What the effect of increasing income volatility will have on stock price for the upcoming IPO?

What are the objectives of hedge accounting?

What types of instruments can be used for hedging?

What types of financial statement items or transactions can be hedged?

What criteria must be met to establish a hedge?

From an accounting perspective, what types of hedges exist?

What is the accounting and financial statement effects of fair value and cash flow hedges?

Is there any type of transaction/event that can be hedged under U. S. GAAP and not International GAAP or vice versa?

For each of these issues, provide clear references to the authoritative guidance (for both U.S. GAAP and IFRS) so that Takashi's accounting staff would be able to find the information needed to implement hedge accounting.

Also, provide analysis for each issue regarding how U.S. GAAP and International GAAP differ or if they have no substantial differences.

Your conclusion should also point out reasons why hedge accounting may be important to Takashi as the company considers its potential IPO, it is apparent to help the understand why hedging can assist.