Accounting of Forex Gain/Loss on Forward Contract

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Querist : Anonymous

Querist : Anonymous (Querist)

12 August 2010 A company borrows USD 100 by way of FCNR (agst WCL) on say 5th Jul 10 at Rs. 46.74 On 10th Jul 10, when the spot rate is Rs. 46.10, it takes a Forward Contract agst the above FCNR loan at Rs. 46.64

Question:
a) Will there be Discount of Rs. 0.10 on Fwd. Cont i.e. difference between the rate at which it is borrowed Rs. 46.74 and the rate at which Fwd. Cont is taken Rs. 46.64 OR
b) Will there be Premium of Rs. 0.54 on Fwd. Cont. i.e. difference between the spot rate on 10th Jul Rs. 46.10 and the forward contract rate Rs. 46.64

CA SMR

CA SMR (Expert)
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12 August 2010 As per point 36 of AS 11 b) seems correct.
AS 11
38.An enterprise may enter into a forward exchange contract or another financial instrument that is in substance a forward exchange contract, which is not intended for trading or speculation purposes, to
establish the amount of the reporting currency required or available at the settlement date of a transaction. The premium or discount arising at the inception of such a forward exchange contract should be amortised as expense or income over the life of the contract.
Exchange differences on such a contract should be recognised in the statement of profit and loss in the reporting period in which the exchange rates change. Any profit or loss arising on cancellation or renewal of such a forward exchange contract should be recognised as income or as expense for the period.

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