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treatment of forward cover sale

JOSEPH DAVID (GM FINANCE) (286 Points)

16 August 2010

A company has entered on 01.01.2010 forward cover for sale of 100000 USD in June, 2010(Expected sale)-The contract is entered to hedge the foreign currency risks of future sales-

USD spot rate on 01.01.2010—47 Rs

Forward Rate for 6 months -- 50 Rs.

Year end rate 31.03.2010—spot rate—45

Forward rate for 3 months(on 31.03.2010)-46

a)Whether AS11 is applicable or AS 30

b)What profit they have to book before 31.03.2010 (year ending date)and after 31^st march, 2010

c)What accounting entries are to be passed for the above forward cover

Regards

Joseph David

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3 Replies

Manoj BG (Tax Professional and in Service) (1795 Points)
Replied 16 August 2010

Dear Joseph,

Forward contract transaction is covered by AS-11 and not by AS-30.

Following are the accounting entries and income booked for 31.03.2010.

01.01.2010	Debtors a/c -----------------------------------------------Dr. To Sales (Being sale made)	47,00,000	47,00,000

01.01.2010	Foreign currency receivable a/c -------------------Dr. To Foreign currency payable a/c To Deffered premium (Being forward contract entered into)	50,00,000	47,00,000 3,00,000

31.03.2010	Foreign currency payable a/c------------------------Dr To Exchange gain/ loss A/c (Being loss on exchange rate accounted for)	2,00,000	2,00,000

31.03.2010	Exchange gain/ loss a/c-------------------------------Dr To Sundry debtors a/c (being loss on exchange fluctuation at the year end accounted for)	2,00,000	2,00,000

31.03.2010	Deffered Premium A/c----------------------------------Dr To Forward contract Premium A/c (being proportionate gain on forward contract transferred to forward premium a/c)	1,00,000	1,00,000

31.03.2010	Forward contract premium A/c---------------------Dr To profit and loss a/c (Being gain booked)	1,00,000	1,00,000

REGARDS,

MANOJ

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JOSEPH DAVID (GM FINANCE) (286 Points)
Replied 17 August 2010

Originally posted by : Manoj B. Gavali

Dear Joseph,

Forward contract transaction is covered by AS-11 and not by AS-30.

Following are the accounting entries and income booked for 31.03.2010.

01.01.2010

Debtors a/c -----------------------------------------------Dr.

To Sales

(Being sale made)

47,00,000

47,00,000

Dear Mr Manjoj

Thanks a lot for your reply-

somebody is suggesting AS 11 is applicable only for the forward contracts taken for existing assets/liability and AS 30 isapplicable for future firm commitment/forecast transactions.

since the transation is forecast transaction how to account for as per AS30--

Since AS30 is not mandatory can we close march 2010 accounts without revaluation

Whether auditor has to quality

Pl reply

Joseph David

01.01.2010

Foreign currency receivable a/c -------------------Dr.

                      To Foreign currency payable a/c

                      To Deffered premium

(Being forward contract entered into)

50,00,000

47,00,000

3,00,000

31.03.2010

Foreign currency payable a/c------------------------Dr

                      To Exchange gain/ loss A/c

(Being loss on exchange rate accounted for)

2,00,000

2,00,000

31.03.2010

Exchange gain/ loss a/c-------------------------------Dr

                      To Sundry debtors a/c

(being loss on exchange fluctuation at the year end accounted for)

2,00,000

2,00,000

31.03.2010

Deffered Premium A/c----------------------------------Dr

                      To Forward contract Premium A/c

(being proportionate gain on forward contract transferred to forward premium a/c)

1,00,000

1,00,000

31.03.2010

Forward contract premium A/c---------------------Dr

                      To profit and loss a/c

(Being gain booked)

1,00,000

1,00,000

REGARDS,

MANOJ

JOSEPH DAVID (GM FINANCE) (286 Points)
Replied 17 August 2010

Dear Manoj

Thanks for your reply-

but somebody is suggesting AS11 is applicable for existing liabilities & assets and AS30 is applicable for forecast transactions-In such a case whether the above entries are correct?

AS30 is not mandatory can a company avoid revaluation of forward covers in the year

Kindly explain

Joseph David