Ifrs fx contract treatment

IFRS 817 views 3 replies

Jack

abc

25 Points Joined March 2012

Hello ,

I would like to receive inputs on this query, thanks in advance.

A company based in India wants to buy goods from company based in Europe. Following scenario can be assumed

01.03.2012 : A deal was done = The company in India would buy100 EUR (purchase) worth of goods, by credit term 90 days after invoice date (estimated due 31.08.2012)

The company in India, book FX forward contract =1 EUR @ 42.00 INR/EUR by settlement date 31.08.2012

31.05.2012 : The suppliers finishes the production after taking almost 3 months and issue invoice for shipment.

: the buyer receive invoice and book account payable 100 EUR by current actual FX rate which may be @ 39.00 INR/EUR. First of all, is it allowed to book A/P at 39.00 INR/EUR?

31.08.2012 : The buyer pays to supplier by FX booked rate = 100 EUR @ 42.00 INR/EUR, and buyer books FX loss = (39 INR – 42 INR ) x 100 EUR = 300 INR.

Since the buyer has now a loss of 300 INR and since this being a hedged transaction. I would like to know how the FX loss of 300 INR would be offset to make it a zero sum game?

Thanks.

Replies (3)

CA Sachin Rastogi

Audit/IFRS Manager

338 Points Joined September 2009

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:

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.

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.

Jack

abc

25 Points Joined March 2012

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.

CA Sachin Rastogi

Audit/IFRS Manager

338 Points Joined September 2009

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.