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Applicability of AS - 11, in the case of Forward Contract

Vipin (Audit) (33 Points)

05 February 2008

Whether AS-11 is applicable for forward contract entered for hedging purpose? It is given in the AS- 11 as a foot note that AS-11 is not applicable for forward contract entered into for hedging purpose in the case of firm committment. Can anyone explain what is a firm committment? Does it mean that AS-11 is applicable only in the case of speculative transaction?

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5 Replies

Suresh VR (Treasury) (29 Points)
Replied 09 March 2009

Originally posted by :Vipin

Ans:

AS 11 is applicable for speculative transactions and for forwards taken as hedges in case of recognised assets / liabilities.

It is not applicable for firm commitments / highly probable forecasted transactions. AS 30 is applicable for that.

AS 11 prescribes separate accouting treatment for speculative and hedging transactions.

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CA SUDIPTA SINHA (Commerce Coaching- Accounts Cost FM) (735 Points)
Replied 09 March 2009

for the purpose of the accounting treatment forward contracts can be classified into two groups :

1. forward exchange contact entered for managing risk(hedging)

2. orward exchange contact entered fortrading or speculation.

in the first case, the premium or discount at the inception of the contarct is amortised over the life of the contract and any profit/loss from exchange difference is recognised in the statement of profit or loss.

in the second case, the gains/loss is recognised in the statement of profit and loss and the premium or discont is not recognised seperately.

thses are the treatments of forward contract as per the AS 11. i have not seen anything that 'AS-11 is not applicable for forward contract entered into for hedging purpose in the case of firm committment'.

Suresh VR (Treasury) (29 Points)
Replied 10 March 2009

Dear Brother

Initially, ICAI has issued a circular in 2004 claiming that AS 11 is not applicable for forward contracts taken for commitements / forecasted transactions. You can find that in the below link: "https://www.slideshare.net/sanjay_jhaa/accounting-for-forward-exchange-contracts"

For the same, I tried getting the link frm ICAI site... but the site was down

Again in Jan 2006, they issued an other circular stating a separate accounting treatment for forwards taken for forecasted transactions (MTM accounting) and deferred it.

And lastly in Mar 2008, they issued an other circular withdrawing the earlier ones which states that AS 30 is applicable for forward contracts taken for forecasted transactions.

Link: https://www.icai.org/post.html?post_id=310

So to conclude, till AS 30 gets mandatory, AS 11 is applicable - but only for forwards taken for trading purpose and forwards taken to hedge recognised assets & liabilities. AS 30 is applicable for forward contracts taken to hedge forecasted transaction / firm commitments

GNANAPRAKASAM.P (Officer) (21 Points)
Replied 01 April 2010

AS 11 is applicable only to the forward contracts taken for the existing assets / liability. In case of future firm commitment / forecast transaction, AS-30 is applicable.

Example of furture firm commitment - If the Company has issued a purchase order for import of equipment and delivery of equipment will happen after 3 or 6 months. In this case, as per purchase order issued, you have future firm commitment of x foreign currency payable after six monts.

Example of Forecast tranaction : Forecasted Export Sales