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As - 11

Ankit Jain (CA) (46 Points)

06 July 2012

Hi,

This is a query related to AS - 11 , for the treatment of foreign exchange gain / Loss or revaluation to be done for forward contract booked for hedging purpose as well as for the underlying.

Query is that, assume that the forward contract is taken on 1st May 2011 for 1 year, wherein spot rate was Rs. 45 and after considering a premium of Rs.2 , the forward rate was Rs. 47

The actual underlying for this contract was taken on 1st May 2011 where in the spot rate was Rs. 45, but later on this forward contract was substituted for another underlying on 1st December 2011 wherein the spot rate was Rs. 52.

Kindly provide the accounting treatment for the same as on 31st March 2012 where in the spot rate is Rs.50

Assume contract amount is $ 1 Mio.

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4 Replies

Sanjay Chauhan (IFRS) (IFRS) (2714 Points)
Replied 16 July 2012

Without going into complications, following is to be done:

if there is an existing underlying for whihc the forward contract is taken, then do the follwing:

1. MTM the underlying foreign curreny loan that is outstanding on the balance sheet date.

2. MTM the forward contract (only spot) and account the mtm in forward contract receivable / payable account.

3. Group the account in point 2 with loans in the balance sheet.

4. Amortise the premium part of the open forward contract at the balance sheet date over the term of the contarct.

Net impact

1. The liability outstanding on balance sheet date will be appearing at forward rate.

2. unamortised premium will be pat of 'Other assets' on the balance sheet.

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CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 16 July 2012

Ankit, to qualify for hedge accounting you must have hedged item and hedging instrument. In your case, both these are not clear. I am assuming that yours is a cash flow hedge where you have taken the forward contracts against the repayment of foreign currency denominated loans. Accounting treatment will be done in the following manner as per IFRS:

1. MTM the underlying foreign curreny loan that is outstanding on the balance sheet date and take the FX loss/ gain in the income statement.

2. Take the MTM of the forward contract (from bank) and account the same as forward contract receivable / payable account with the second leg as other comprehensive income in the equity (assuming it is effective). The MTM value of forward if ineffective will be taken to income statement.

3. Preimum paid at the inception should be recorded as a type of prepaid expense in the balance sheet. For the open forward contract obtain the MTM from the bank and amortise the prepaid expenses to the extent of MTM recd from the bank. Eg. Premium paid if Rs 2 and MTM is Rs 1.5 then amortise only 0.50 to the income statement.

Please be clear if you need any other explanations.

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Sanjay Chauhan (IFRS) (IFRS) (2714 Points)
Replied 17 July 2012

I appreciate eagerness of Sachin to help other especially on IFRS.

Am afraid, there is a need of verification before responding on this forum including this query.

This is not a cash flow hedge, neither does AS 11 allow equity accountng and neither does hedge accounting say premium amortisation.

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 17 July 2012

Thanks Sanjay, it went off from my mind that querry was not in the context of IFRS but it was good to know the accounting treatment under indian accounting standards.

Many regards