Which of the following best explains why external consultants have recently advised the company to apply hedge accounting?


A private company manufactures goods for export, the goods are priced in foreign currency B$.

The company is partly owned by members of the founding family and partly by a venture capitalist who is helping to grow the business rapidly in preparation for a planned listing in three years’ time.

The company therefore has significant long term exposure to the B$.

This exposure is hedged up to 24 months into the future based on highly probable forecast future revenue streams.

The company does not apply hedge accounting and this has led to high volatility in

reported earnings.

Which of the following best explains why external consultants have recently advised the company to apply hedge accounting?
A . To provide a more appropriate earnings figure for use in calculating the annual dividend.
B . To make it easier for the market to value the business when it is listed on the Stock Exchange.
C . To ensure that the venture capitalist receives regular annual returns on its investment.
D . To fully adopt IFRS in preparation for listing the company.

Answer: B

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