Question

Use the following information on the U.S. dollar value of the euro.

	Spot Rate	Forward Rate for April 30, 2021 Delivery
October 30, 2020	$ 1.250	$ 1.254
December 31, 2020	1.258	1.256
April 30, 2021	1.260	1.260

On October 30, 2020, a U.S. company forecasts that it will purchase merchandise from an Italian supplier at the end of April 2021, in the amount of €100,000, and will pay the supplier on delivery. On October 30, the company enters a forward contract to buy €100,000 on April 30, 2021 and classifies it as a cash flow hedge of the forecasted purchase. On April 30, 2021, the company receives the merchandise, closes the forward contract and pays the supplier. The company's accounting year ends December 31.

On December 31, 2020, how is the change in value of the forward contract reported?

	A.	$600 loss, reported in income
	B.	$200 gain, reported in other comprehensive income
	C.	$200 gain, reported in income
	D.	$600 loss, reported in other comprehensive income

Answer 1

Internation Accounting Standard IAS 21 " The Effects of changes in Foriegn Exchange Rates " provide the guidance for recognition of changes in foreign Exchange rates.

Initially Recognition:

All the foreign currency transactions shall be translated in to functional currency by applying the spot exchange rate between functional and foriegn currency.on the date of transaction.

The date of transaction is date on which the condition of recognistion of asset or liability are met.

Subsequent recognistion

At the end of reporting period, translation as follows

All the monetary items are recognised at closing rate

All the non monetary items are recognised at historical rate

All the non monetary items are measured at fair Value using the exchange rate on which fair value was measured.

Recognistion of Exchange Differences:

All the exchange differences are recognised in Profit and loss account except following:

1. Exchange difference on all monetary items that are entitys net investment in foreign operations are

in Entity's separate or foriegn oprations financial statement : Profit and Loss account

in Entity's consolidated financial statement : intially recognised in Other commercial income and latter on reclassified in Profit in loss account on disposal of investment in foreign operations.

Accordingly the company in given case :

The Company recognise the intially trnsaction at $ 1.250 and subsequently on closing date 31st December 2020

the company should recognise the transaction at $1.256

The gain in foreign exchange gain $1.256-$1.250= $0.006

Total Gain = $0.06*100000= 600

The gain should reported in Profit and loss account.