Accounting of forward contract (foreign currency )

AS 4122 views 4 replies

Nitin Sevak

Manager

28 Points Joined June 2011

Hi,

Please do let me know the accounting treatment of forward exchange transaction in case of following scenario.

On 1^st December 2011 ,Company received a firm order of Rs. 100,000 USD. to deliver XYZ product to M/S ABC by 30^th Dec 2011. Payment will be received between 15, March 2011 to 14, April 2011(Spot rate 45.00) .

Based on the above order company enters in to the forward contract on 1^st December 2011 with a forward rate of USD 45.95 (Spot rate USD 45.30) with the settlement date between 15, March 2011 to 14, April 2011.

Treatment mentioned in Accounting Standard 11 is applicable in case of forward contract entered based on the recognised assets in books.

Given example is considered as Fair Value Hedge as mentioned in the Accounting Standard 30. Hedge based on the firm commitment.

There would not be any accounting entry at the time of entering in to the forward contract as there is no payment of premium of discount (as mentioned in the AS 30)

Whether it would be the same treatment as mentioned in AS 11 once assets are recognised in the books or any other accounting treatment.

What would be the accounting treatment of following :-

- forward contract at the time of recognition of sale in the books as on Dec 30^th 2011.

- Difference between spot rate and forward rate

- at the time of receiving sale consideration

- at the time of settlement of contract

Regards

Nitin

Replies (4)

Nitin Sevak

Manager

28 Points Joined June 2011

Can anybody suggest me about the treatment

Kannan

Accounts Officer

79 Points Joined August 2007

Pl someone solve this

CA Sachin Rastogi

Audit/IFRS Manager

338 Points Joined September 2009

Dear Nitin

In your case, the forward contract is a derivative instrument which is taken especially for the purpose of hedging the foreign currency sale remittance of USD 100K which will be received in the period 15 Mar 11 to 14 Apr 2011. It seems that your purpose for taking these derivatives was to protect against in variability in cash due to exposure against the fluctuating exchange rates. This is more of a Cash flow hedge and not a Fair value hedge.

Please understand that derivative transactions are totally different transaction when you mirror them with actual transactions. Please see my following comments which will answer your querries:

No journal entries will be passed at the time of entering into the derivative transaction as no premium was paid.
When actual sales are made the sale will be in foreign currency and they will be recorded in books at the exchange rate prevailing on the date of transaction.

Assume that your year end is 31 December 2010 so in that case you need to record the fair value of these derivative instruments which can be obtained from the banks and can result in either a receivable or payable to bank.

The recording of transaction at point 3 above will depend on whether there is a hedge documentation or not. Assuming that there is no hedge documentation so in that case the fair value of these derivative transactions will be considered in income statement and second leg will be a receivable or payable in the balance sheet.

When the sale consideration is received it will be received in USD and you will use your forward contracts to sell this USD currency. Any gain or loss at the time of selling the USD currency will be netted off against the debtors recorded at the time of sale. This can result either in gain or loss on settlement of debtors which is recognised in income statement.