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What is the impact to the balance sheet when a grain hedge is entered into?
ANSWER
Expert Matthew Peterson's Answer:
The term "grain hedge" must first be defined in order to accurately answer the question. By "grain hedge" it is inferred that the entity opened an investment account in which they plan to buy or sell futures or options related to grain contracts so that they might minimize the fluctuations in their grain expense or income over a certain period of time. This type of hedge is considered to be a derivative according to Financial Accounting Standard (FAS) No. 133 as issued by the Financial Accounting Standards Board (FASB). According to FAS 133, this account would be classified as a current asset on the balance sheet and would need to be marked to the market (fair) value of the account as of the balance sheet date.
As for financial ratio analysis, due to the type of investments held in the hedging account, they would be considered to be marketable securities and should subsequently be used in calculating both the working capital and quick (acid-test) ratios.
