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accounting for Forward contract

rajesh (Audit and Assurance) (117 Points)

19 August 2010  

Hi every one...

Here I have a query on Accounting for contracts where I am little bit confused.

Let example:

I am an importer where I imported a material for 10000USD through L/C and entered a Foward contract with bank.

Now I have the exchange rates like this

Date of inception 01.04.10 (Spot Rate) 1 USD = Rs.40

Forward rate for 30.06.10 (payment date) 1 USD = Rs.42

Actual rate on 30.06.10 is 1 USD = Rs. 44

Here in the above case referring to AS-11, when I will book for the forward contract of 10000 USD @ Rs. 42 I will account for the loss i.e. deferred premium of Rs.20000 to be amortised through the period of contract.

So as on 30.06.10 I am paying Rs.420000 (Rs.42 * 10000) where if I Should haven't gone for the forward contract I may have paid Rs. 440000 (Rs.44 * 10000).

So the differntial amount of Rs.20000 which I saved by going with forward contract, can I account it as an income.

need help to remove confusion....


 9 Replies

CA HARISH KUMAR (ACA, B.Com(Hons.)) (80 Points)
Replied 19 August 2010

No, you cannot book that Rs.20,000/- as your income. If you would have not entered into forward contract in that case you will have to book loss of Rs.40,000 (4,40,000-4,00,000). You have not earned that Rs.20,000 in actual so you cannot bokk that as your income.

2 Like

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 19 August 2010

Originally posted by : CA HARISH KUMAR

No, you cannot book that Rs. 20,000/- as your income. If you would have not entered into forward contract in that case you will have to book loss of Rs. 40,000 (4,40,000-4,00,000). You have not earned that Rs. 20,000 in actual so you cannot bokk that as your income.

 nice explanation agreed since unrealised gains are not accounted for in the books


(Guest)
Originally posted by : CA HARISH KUMAR

No, you cannot book that Rs.20,000/- as your income. If you would have not entered into forward contract in that case you will have to book loss of Rs.40,000 (4,40,000-4,00,000). You have not earned that Rs.20,000 in actual so you cannot bokk that as your income.

sagar (CA Final) (379 Points)
Replied 20 August 2010

Harish you are really good in accounts

1 Like

Ankur bansal (a) (135 Points)
Replied 26 December 2010

If The Actual rate on 30.06.10 is 1 USD = Rs. 39, then what is the treatment?

Ankur bansal (a) (135 Points)
Replied 28 December 2010

pls reply

Rineesh Raghavan (MD) (108 Points)
Replied 28 December 2010

Hi Ankur

 

AS 11 speaks about both types of forward contract - speculative and non-speculative. For accounting speculative forward contracts, the actual exchange rate on the date of expiry of forward contract is generally irrelevant. (Speculative means, entering into any Forward Contract without any intention to actually use the underlying asset)

 

For Non Speculative Forward Contract, the closing exchange rate on the date of expiry of forward contract is relevant. This is because, Forward Contract Asset / Liability would be restated as at every reporting date. The corresponding gains / losses would be effect on the Carrying Amount of the Hedged Asset.  

 

Please confirm if you are referring to the Speculative Contract or Non Speculative Contract. Would be able to answer better that way.

 

Rineesh R

Ankur bansal (a) (135 Points)
Replied 28 December 2010

thanks, wel please tell me the treatment of both speculative as well as non speculative, if posible for you....

Ankur bansal (a) (135 Points)
Replied 28 December 2010

This is the example of speculative or non speculative?

Hi every one...

Here I have a query on Accounting for contracts where I am little bit confused.

Let example:

I am an importer where I imported a material for 10000USD through L/C and entered a Foward contract with bank.

Now I have the exchange rates like this

Date of inception 01.04.10 (Spot Rate) 1 USD = Rs.40

Forward rate for 30.06.10 (payment date) 1 USD = Rs.42

Actual rate on 30.06.10 is 1 USD = Rs. 44

Here in the above case referring to AS-11, when I will book for the forward contract of 10000 USD @ Rs. 42 I will account for the loss i.e. deferred premium of Rs.20000 to be amortised through the period of contract.

So as on 30.06.10 I am paying Rs.420000 (Rs.42 * 10000) where if I Should haven't gone for the forward contract I may have paid Rs. 440000 (Rs.44 * 10000).

So the differntial amount of Rs.20000 which I saved by going with forward contract, can I account it as an income. the answer is No.


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