[edit] Fair Value Hedge Example

12/1/Y1
Inventory
$20,000.00
to record purchase and A/P of 20000C
A/P
$20,000.00
12/31/Y1
Foreign Exchange Loss
$1,000.00
to adjust value for S.R of $1.05
A/P
$1,000.00
Forward Contract
$1,176.36
to record forward contract at fair value
Gain on Forward Contract
$1,176.36
3/1/Y2
Foreign Exchange Loss
$1,400.00
to adjust value for S.R. of $1.12
A/P
$1,400.00
Forward Contract
$423.64
to adjust the fwd. contract to its FV
Gain on Forward Contract
$423.64
Foreign Currency
$22,400.00
to record the settlement of the fwd. cont.
Forward Contract
$1,600.00
Cash
$20,800.00
A/P
$22,400.00
to record the payment of the A/P
Foreign Currency
$22,400.00
Again, notice that the amounts paid are the same as in the cash flow hedge. The big difference here is that the adjustments are made directly to the assets and not to the other comprehensive income holding account. This is because this type of hedge is more concerned with the fair value of the asset or liability (in this case the account payable) than it is with the profit and loss position of the entity