How does hedged loans are accounted in company's BS?
Hi guys! I would like to know if someone could give me some help regarding derivatives and hedged debt ... It is basically two questions:
(1) When a company decides to hedge a loan, doing swap for the whole loan, how does FX variations impact company's BS and Income Statement?
After reading about it I came to the below conclusion which i'm not entirely certain is correct:
Let's say a company funded itself through a USD loan and swapped it to MXN.
If the MXN depreciates, then it will report a decrease an increase on its debt and an increase in Derivatives (assets). If the MXN appreciates, then it will report a decrease on its debt, and an increase in Derivatives (Liabilities).
Does the above have any impact on income statement? As per what i understood No, but not certain.
My second question is the following:
(2) What is the impact on Income Statement of hedging raw materials purchase (USD to MXN)?
Again, i would like to know if the below is correct:
If a company hedges 100% its raw material purchases (lets say through NDFs), and in case the MXN devaluates, what happens? I would say that then the company would report on its COGS the price in MXN at the FX agreed when it entered the derivative transaction, and it would also report a derivative gain equal to the difference between actual FX and FX at derivative transaction date. In case the MXN appreciates, then it would report the same COGS, but a derivative loss. Does that makes sense?
Thank you all in advance.