Forward contracts accounting treatment

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mahesh (Querist)
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22 April 2012 A company entered into forward contracts for april may june on january 1st. Forward contract prices were 48.12, 48.23 and 48.45. If at 31 march 2012, the exchange price was 49. How the forward contracts should be accounted for at 31 March 2012.
As per AS 11 or AS 30 of IGAAP or do we need to use hedge accounting?
Please help me with the accounting entries and also the applicability of respective accounting standard.

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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23 April 2012 The profit or loss as per the rate as on the date of accounting should be applied as if it is stock in trade and book the profit or loss in case there is further profit or loss the same should be booked on the date of maturity

mahesh

mahesh (Querist)
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23 April 2012 I have asked about accounting standard that is applicable and also accounting entries. If you give a general answer that I need to book gain or loss and take it as a stock in trade means what I need to do in closing the books

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Asha Kanta Sharma

Asha Kanta Sharma

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25 July 2024 In your scenario, where a company has entered into forward contracts for currency exchange and the exchange rate has changed by the reporting date (31 March 2012), the accounting treatment depends on whether the contracts qualify for hedge accounting under Indian Accounting Standards (Ind AS) or Accounting Standards (AS) as per the Indian Generally Accepted Accounting Principles (IGAAP).

### Applicability of Accounting Standards:

1. **AS 11 (Revised)**: This standard deals with the accounting treatment for the effects of changes in foreign exchange rates. However, AS 11 has been superseded by Ind AS 21 in India for companies following the Indian Accounting Standards converged with International Financial Reporting Standards (IFRS).

2. **Ind AS 21**: This standard prescribes how to include foreign currency transactions and foreign operations in the financial statements of an entity, and how to translate financial statements into a presentation currency.

3. **AS 30 (Revised)**: This standard deals with financial instruments: recognition and measurement, including forward exchange contracts.

Given the scenario, since your company is reporting as of 31 March 2012, and considering the forward contracts entered into for future months (April, May, June) with different forward rates () compared to the spot rate at the reporting date (49), here's how you should approach the accounting:

### Accounting Treatment:

1. **Recognition of Forward Contracts**: The forward contracts should be recognized on the balance sheet as financial instruments. They are measured at fair value, which is the present value of the future cash flows based on the contracted rates.

2. **Fair Value Measurement**: The fair value of the forward contracts as of 31 March 2012 would be calculated based on the difference between the contracted forward rates and the spot rate (49 INR/USD).

3. **Recording Gain or Loss**: Any gain or loss arising from the revaluation of the forward contracts should be recognized in the profit and loss account for the period. This reflects the change in fair value of the contracts due to changes in exchange rates.

### Accounting Entries (Example):

Assuming the following forward contract details as of 31 March 2012:

- Spot rate: 49 INR/USD

**Example Calculation (for one contract)**:

- If a contract was entered at 48.12 and the spot rate at 31 March 2012 is 49:

Forward Contract (to buy USD) | Spot Rate (31 March 2012)
-----------------------------|--------------------------
48.12 INR/USD | 49 INR/USD

Unrealized Loss (or Gain) = (49 - 48.12) × Contract Amount

- Assume the contract amount is 1L USD:
Unrealized Gain = (49 - 48.12) × 1L= 88K INR

### Accounting Entry:

To record the unrealized gain or loss:

- **Profit and Loss Account (Dr/Cr)**: Recognize the gain or loss
- **Forward Contracts (Cr/Dr)**: Record the change in fair value on the balance sheet

### Conclusion:

- **AS 11/Ind AS 21/AS 30**: These standards guide the accounting treatment for foreign exchange transactions and instruments like forward contracts.
- **Hedge Accounting**: If the forward contracts meet the specific criteria under these standards, hedge accounting may apply, allowing certain gains or losses to be deferred and recognized in line with the underlying hedged items.

Consulting with a qualified accountant or financial advisor is recommended to ensure compliance with applicable accounting standards and proper implementation of hedge accounting if applicable.