Financial Instruments. Master agreement derivative under both the US GAAP and IFRS

Financial Instruments
Name
Course
Institution: 
Date
 Master agreement derivative under both the US GAAP and IFRS A derivative is a financial instrument where the value changes as a response to changes in underlying variable(s) like the interest rate, current exchange rate, stock price or the commodity price. The forward contract is an agreement that gives a right and obligates the market participants to buy / sell an underlying asset on a specific future date at a certain price.  The forward is constructed starting from a certain underlying asset at its current price and financing cost. Both the US GAAP and IFRS recognize different types of hedges, and in measuring the derivatives falsely stating the fair value is a fraud risk.Companies that exports to other countries are exposed to the exchange rate between its local currency and the foreign currencies as is the case of Ricky Corporation (Ricky). The company is charged for its sales, can hedge in advance the foreign exchange risk by selling forward the currencies the company expect to receive in the future. Forward contracts are similar to futures contracts, but the later are traded in the market, while the former are private agreements between two companies, financial institutions, or institution and client.Part 1: Assume that the potatoes are worth $1,250 at the end of 30 days. Explain in detail how the forward exchange contract might or would be settled in 30 days? What are Potato’s options with respect to the forward exchange contract?There is a premium $50 ($1,250-$1,200) on the 30 day forward contract as the forward price is $1,250 and the spot price is $ 1,200. The premium rate is [(1,250-$1,200)/1,200]* 12=50%. Companies report financial instruments, including the derivatives, at fair value (Palea, 2014). The fair value is the present value of variation in the forward exchange rate.  As the price is higher after three months the buyer (Potato) benefits while the seller, Ricky (producer) loses out on making a higher profit. There is an assumption that both entities enter into an agreement based on expectations that they would both make an acceptable profit and hedge their positions. Potato may choose not to enter into the forward agreement, and as prices rise to $1,250 the company pays more than if it had hedged for $1,200. Potato wants potatoes for the French fries and since there is an expectation that the price will rise the company accepts the current price ($1,200) and will make an acceptable profit. The derivative contract is necessary to smooth the price fluctuations and reduce risks (Kieso, Weygandt & Warfield, 2014).Part 2Assume that potatoes are not easily convertible into cash and that Potato has a history of taking delivery of the potatoes under these types of contracts (gross settlement). Potato has decided NOT to document the instrument as a normal purchase and sales contract. Prepare the journal entries required under both the US GAAP and IFRS separately, with detailed explanations of the basis for each dollar journal entry amount, and a detailed journal entry explanation with appropriate reference(s) to the accounting literature for both standard setters for each respective journal entry.Journal entry...