Ifrs fx contract treatment

Hi Jack

First of all you have to understand that hedge is done to mitigate/ minimise the risk attributable to the foreign exchange fluctuation risk, interest rate risk etc. It doesn’t guarantee that you will have zero losses at the end of the transaction. In the above case, there are 2 transactions:

1. Buying of goods for Euro 100 which is correctly recorded on the relevant date (i.e date on which risks and rewards are passed to the buyer). Accordingly, it happened on the date when rate was 1 Eur= 39INR which is absolutely correct in terms of IAS 21.

2. The second transaction relates to the entering into the forward contract for selling the Euros at 1 Eur= 42 INR. On the expiry date of forward contract i.e 31 Aug 2012, the payables recorded @ 39 will be settled @ 42 and accordingly there is a loss of INR 300 (3x 100Euros) which should form part of your finance cost expense in income statement.

Hope that above comments will help u in understanding the hedging concept.

Thanks Sachin,

My follow up query is, as per IFRS, is it also allowed to book A/P at Fx forward rate i.e. to book A/P at 1 EUR = 42 INR on 31.05.2012? (in order to avoid showing fluctations in IS over various time periods).

Thanks in advance.

Jack As per IAS 21- booking of payables at a future forward rate is not allowed. U need to book it on the rate prevailing on transaction date onlly i.e 39 and not 42.