Exchange rates and accounting distortions in hedge operations Hypothetical case with real market data

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Gilvan Machado Morais
Pietro Ladeia Christovam
Maria Paula Vieira Cicogna
Ricardo Luiz Menezes da Silva
Maurício Ribeiro do Valle


Our objective is to uncover accounting distortions caused by using different exchange rates in hedge operations, and to introduce hedge accounting as a solution. Exchange rate differences arise from a lack of accounting standards to define which exchange rate to use. Through a case study, we illustrate the effect of different exchange rates on financial statements. We show that both earnings and equity can change, as a result of using hedge accounting. In addition to hedge accounting, we suggest discounting assets and liabilities in dollars by the exchange coupon, then converting them by PTAX as a way to ensure compatibility; alternatively, Brazil’s regulatory body could publish an official exchange rate to be used.

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Long Paper