| Course | ACC 690 Advanced Topics in Financial Reporting |
|---|---|
| Module | Module 2 |
| Paper type | graduate assignment applying cash flow hedge accounting |
| Length | About 1,010 words, 6 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | MS Accounting |
| Updated | October 2026 |
Free sample paper for ACC 690 Module 2
Cash Flow Hedge Accounting for First-Quarter Corn Purchases
[Student Name]
Southern New Hampshire University
ACC 690: Advanced Topics in Financial Reporting
Module Two Assignment
[Instructor Name]
[Date]
The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.
Cash Flow Hedge Accounting for First-Quarter Corn Purchases
Introduction
Across its three plants the company grinds roughly 120 million bushels a year. Most is bought from local elevators under contracts priced at the Chicago Board of Trade futures price plus a local basis. To lock in the futures price for first-quarter purchases, on October 1, 2025, the company bought 4,000 March corn futures contracts covering 20 million bushels at $4.30 a bushel. This assignment applies ASC 815 as amended by ASU 2017-12 (Financial Accounting Standards Board, 2017).
Derivative Status and Scope
A derivative under ASC 815-10-15-83 has an underlying and a notional amount, requires little or no initial investment and can be settled net. The futures meet each element: the underlying is the futures price, the notional is 20 million bushels, the initial margin is small, and futures settle daily through the exchange. They are derivatives.
The forward contracts with elevators also have an underlying and notional, but they qualify for the normal purchases and normal sales exception in ASC 815-10-15-22: they provide for physical delivery of corn in quantities the plants will use over a reasonable period, and the company documents its election. They are accounted for as executory purchase commitments, not derivatives.
Designation and Documentation
ASU 2017-12 allows a company to hedge a contractually specified component of a forecasted purchase. Because the elevator contracts price corn at the March futures price plus basis, the company designates the futures price component as the hedged risk, which makes the hedge highly effective by design.
Hedge documentation at inception, October 1, 2025
| Element | Content |
|---|---|
| Objective | Fix the futures price component of first-quarter corn purchases to protect crush margin |
| Hedging instrument | 4,000 long March CBOT corn futures, 20 million bushels at $4.30 |
| Hedged transaction | Forecasted purchases of 20 million bushels of corn at the Iowa plants, January to March 2026, probable based on production plans |
| Risk hedged | Variability in the CBOT March futures price component of the purchase price |
| Effectiveness assessment | Initial quantitative regression of futures on component prices, then qualitative quarterly assessment |
The forecasted purchases are probable because the plants consume about 30 million bushels a quarter, well above the hedged amount, and the company has bought at least that much corn in every first quarter since the Iowa plant opened.
Effectiveness
The initial regression of changes in March futures against changes in the futures component of past elevator purchases shows a slope of 1.0 and an R-squared near 1.0, since the component is the futures price itself. After that, the company assesses effectiveness qualitatively each quarter, confirming that the critical terms still match and the forecasted purchases remain probable. Under ASU 2017-12, the entire change in the futures' fair value is recorded in other comprehensive income; ineffectiveness is no longer measured separately.
Accounting Through Year End
Futures settle daily through variation margin, so the company's broker account receives cash as prices rise. At year end the March contract settled at $4.55, up $0.25 a bushel, a $5.0 million gain. The company records the gain in other comprehensive income, with the cash in its margin account. Accumulated other comprehensive income includes the $5.0 million gain at year end.
Settlement and Reclassification
In the first quarter, the company bought the 20 million bushels from elevators at an average futures price of $4.62 plus a basis of minus $0.20, $4.42 a bushel, and closed the futures as each purchase was priced, for a total gain of $0.32 a bushel, $6.4 million. The gain remains in accumulated other comprehensive income after the purchase. Under ASC 815-30-35-38, it moves into earnings in the period the hedged corn cost does, that is, as the ethanol made from that corn is sold and its cost reaches cost of goods sold. Because the plants hold only about two weeks of corn and ethanol in inventory, so nearly all of the gain moves to cost of goods sold within the first quarter, giving an effective corn cost of $4.10 a bushel, the price the company set out to lock in plus the basis.
Without Hedge Accounting
If the company did not designate the futures as a hedge, the $5.0 million gain would be in fourth-quarter cost of goods sold or other income, and the first quarter would carry corn at $4.42 with only the $1.4 million of first-quarter futures gains to offset it. Fourth-quarter gross margin would rise by about 2 percentage points and first-quarter margin would fall by a similar amount, with no change in the economics. Several ethanol producers accept this and present an adjusted margin that moves the gains to the period of the hedged purchase. That approach avoids documentation but invites questions from investors and, if adjusted figures appear in SEC filings, the rules on non-GAAP measures.
If the Purchases Stop Being Probable
If a plant shutdown made part of the forecasted purchases no longer probable, ASC 815-30-40 requires the company to discontinue hedge accounting for that portion. Gains already in accumulated other comprehensive income stay there if the purchases are still reasonably possible, and are reclassified to earnings immediately if it becomes probable they will not occur. The company's planned maintenance outage at the Nebraska plant in February does not affect the Iowa purchases hedged here, but the hedge file records that assessment.
Presentation and Disclosure
The reclassified gain is presented in cost of goods sold, the same line as the hedged corn cost, as ASU 2017-12 requires. In the cash flow statement, margin receipts on hedges of operating purchases are operating cash flows. Disclosures include the objectives and strategies, the volume of hedged bushels, the fair value of open derivatives, the gains in other comprehensive income and reclassified, and the amount expected to be reclassified in the next twelve months. Campbell (2015) found that the amounts held in accumulated other comprehensive income from cash flow hedges help predict future gross margins, which supports a clear disclosure of their expected timing (Kieso et al., 2019).
Conclusion
Cash flow hedge accounting lets the company report a first-quarter corn cost of about $4.10, matching its hedging intent, instead of a fourth-quarter gain and a first-quarter loss.
References
Campbell, J. L. (2015). The fair value of cash flow hedges, future profitability, and stock returns. Contemporary Accounting Research, 32(1), 243-279. https://doi.org/10.1111/1911-3846.12069
Financial Accounting Standards Board. (2017). Derivatives and hedging (Topic 815): Targeted improvements to accounting for hedging activities (Accounting Standards Update No. 2017-12). Author.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (17th ed.). Wiley.
What the ACC 690 Module 2 instructions ask for
The Module Two assignment in ACC 690 usually presents a hedging transaction and asks for the full ASC 815 treatment. Plan to determine whether each instrument is a derivative and whether any scope exception applies, identify the hedge type, prepare the inception documentation, assess effectiveness, record the entries over the life of the hedge, including reclassification from other comprehensive income, and draft the required disclosures. Most versions use the post-2017 rules, so explain component hedging and the elimination of separately measured ineffectiveness where they apply. Show the entries and amounts, and explain why each criterion is met, including what would happen if the forecasted purchases stopped being probable.
How this ACC 690 Module 2 derivatives assignment example is built
The paper concludes that exchange-traded corn futures are derivatives, while forward contracts with local elevators qualify for the normal purchases exception because they result in physical delivery in quantities the plants use. The company designates the futures as a cash flow hedge of the CBOT price component of 20 million bushels to be bought in the first quarter. Documentation at inception covers the risk, the instruments, the forecasted transaction and the method of assessing effectiveness. At year end, a $5.0 million gain sits in other comprehensive income. When the corn is bought at a futures price of $4.62, the total $6.4 million gain is held in accumulated other comprehensive income and released to cost of goods sold as the ethanol made from that corn is sold.
Where the ACC 690 Module 2 rubric puts the points
Rubrics for the derivatives assignment typically score the derivative and scope analysis, hedge designation, documentation, effectiveness assessment, journal entries, reclassification, presentation and disclosures. Top papers explain why the forward contracts meet the normal purchases exception, apply component hedging correctly, record the full change in fair value in other comprehensive income for a highly effective hedge and time reclassification to when the hedged cost affects earnings. Graders also reward attention to daily margin settlement and to what happens if a hedged purchase no longer looks probable. Common deductions include measuring ineffectiveness under the old rules, reclassifying when the corn is bought instead of when it is used, omitting documentation and treating all corn contracts as derivatives.
ACC 690 Module 2 help: the mistakes that cost points
Derivatives papers most often slip on the reclassification date: for a hedge of a forecasted inventory purchase, the gain stays in accumulated other comprehensive income until the inventory affects earnings, not when the purchase occurs. A second weak spot is scope: physical forward contracts used in normal operations can be exempt, which changes how much of a company's hedging program falls under derivative accounting at all. If your case uses a fair value hedge or an interest rate swap, the documentation steps are similar but the entries differ. Write out the inception documentation as a short table; graders look for each required element. Then record the year-end entry before the settlement entries.
Get ACC 690 Module 2 written to your instructions
Send the ACC 690 Module 2 assignment and the hedge facts. The paper will test derivative status, set out designation and documentation, assess effectiveness, record entries through other comprehensive income and draft disclosures with Codification support. Two days is typical, and there is no fee for your first request. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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ACC 690 Module 2 questions, answered
Where can I find a free ACC 690 Module 2 Derivatives sample?
This page includes a full ACC 690 Module 2 assignment applying cash flow hedge accounting to corn futures.
What is the normal purchases and normal sales exception?
A scope exception for contracts that provide for physical delivery of items used or sold in the normal course of business in reasonable quantities, which are then not accounted for as derivatives.
What must hedge documentation include at inception?
The risk management objective and strategy, the hedging instrument, the hedged item or forecasted transaction, the risk being hedged and the method of assessing effectiveness.
When is a cash flow hedge gain reclassified for a forecasted inventory purchase?
When the hedged transaction affects earnings, which for inventory is when the inventory is sold and its cost reaches cost of goods sold.
What is a contractually specified component?
A component of a purchase price explicitly referenced in a contract, such as a futures price plus a basis, which ASU 2017-12 allows to be designated as the hedged risk.