A1: Reserve should be held back and released in month 2 commensurate with the timing of the sale as this is when COGS is typically recognized in earnings.
A2: Excellent points/examples. This is known as a dual purpose hedge in which the FX risk being hedged does not terminate with fulfillment of the purchase but continues through settlement via invoicing and AP (as you stated), most commonly when purchases are made on credit. There is a bifurcation/apportioning of the FX hedge that needs to occur between the CF and FV hedges – let’s call them CFh and FVh. In the case of CFh, this portion would still remain in reserve until the date of sale. For FVh, this would offset the FX remeasurement on the AP immediately in earnings and then terminate on the date of cash settlement on the hedged item.
In summary, these are complicated hedge accounting relationships that require careful consideration and thoughtful execution. Let’s chat direct with any follow up questions.
