With the prospect of off-shore cash moving back to the US, and much of it currently denominated in EUR or other volatile foreign currencies, when should treasury departments be protecting the USD value of these soon-to-be repatriated amounts?
The EUR has been trending stronger, but will that change when billions of EUR denominated profits held in Ireland and the Netherlands start being pulled back to the US in US dollars? These conditions present a classic opportunity for Net Investment Hedging under ASC 815.
If a corporation were to hedge by locking in the USD value of the EUR cash using forwards, or put a floor on the USD value of the EUR using options, all the changes in value of the instrument, including the final changes in the cash value would reside in Cumulative Translation Adjustment (CTA). (This is only true if the hedge is properly designated and documented under ASC 815). CTA is an account within Other Comprehensive Income where the change in value of foreign entities are collected and reported. So changes in the EUR cash held in EUR functional entities are captured in CTA.
When the cash is repatriated to the US (and even if it never is) the changes in the derivative, along with the changes in the cash’s value would remain in CTA. The only time the derivative gain/loss will find its way to earnings will be when the foreign subsidiary is liquidated.
If you are interested in discussing how to protect the USD value of foreign amounts your company expects to repatriate using Net Investment Hedging, our team of derivative hedge accounting experts is ready to help, contact us today.