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AFAR8718-Foreign-Currency-hedging Solutions

This document discusses accounting for foreign exchange gains and losses under various scenarios. It addresses initial measurement of monetary and non-monetary items, subsequent measurement, problems involving spot rates from the seller's and buyer's perspective, hedge accounting involving both the hedged item and hedging instrument, and firm commitments. The key points are initial measurement uses the historical rate, subsequent uses closing rate for monetary items and historical for non-monetary, spot rates differ between buyer and seller, and hedge accounting involves comparing rates on the hedged item and hedging instrument at different dates.

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GJames Apostol
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436 views2 pages

AFAR8718-Foreign-Currency-hedging Solutions

This document discusses accounting for foreign exchange gains and losses under various scenarios. It addresses initial measurement of monetary and non-monetary items, subsequent measurement, problems involving spot rates from the seller's and buyer's perspective, hedge accounting involving both the hedged item and hedging instrument, and firm commitments. The key points are initial measurement uses the historical rate, subsequent uses closing rate for monetary items and historical for non-monetary, spot rates differ between buyer and seller, and hedge accounting involves comparing rates on the hedged item and hedging instrument at different dates.

Uploaded by

GJames Apostol
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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8718

Initial Measurement
spot rate at the date of transaction

Subsequent
Monetary Item - Use the closing rate
Non-monetary item
1. At historical cost - rate at the date of transaction
2. At Fair Value - the change in fair value is either treated as profit or loss or
OCI
(the change in fair value is not treated as gain or loss on Foreign
exchange)

Problem 1
Spot Rate
Sellers Point of View - Use Buying spot rate
Buyers point of view - Use Selling rate
1. Non-monetary = Sales Revenue (39 x 1,500) = 58,500
2. Monetary = Accounts Receivable (45 x 1,500)= 67,500
3. Monetary = Accounts Payable (47 x 1,000) = 47,000
4. Net FOREX gain
Sale Transaction (45 - 39 = AR Increase by 6 gain x 1,500) 9,000
Purchase Transaction (47 - 42 = AP Increase by 5 loss x 1,000) (5,000)
Total 4,000

Problem 2
Jan.30 75.75
Dec. 31 74.85
Increase in liability (loss) 0.90
x Monetary Items (NP 108,000 + Interest Payable 1,620) 109,620
FOREX LOSS 98,658
Interest payable = 108,000 x 18% x 1/12 = 1,620

Problem 3 Sellers Point of View


2020 Hedge Item - Change first the exchange rate to direct quotation
(Spot rate)
Nov.2 (1/0.02387) 41.90
Dec.31 (1/0.02457) 40.70
Decrease in Accounts Receivable - Loss (1.20)
x Foreign Currency 8,340,000
Forex loss on hedge item (10,008,000)

2021 Hedge Instrument Forward Contract


(forward rate)
Dec. 31 (1/0.02475) 40.40
Jan.31 (1/.02494) 40.10
Decrease in Forward Contract Payable - gain 0.30
x Foreign Currency 8,340,000
Forex gain on hedge item 2,502,000
Computation of FOREX GAIN OR LOSS
Hedge item
Balance sheet date = Compare spot rate Date of Transaction and BS date
Settlement date – Compare spot rate BS date and Settlement date

Hedge Instrument
Balance Sheet date = Compare Forward Contract rate date of transaction of forward contract and BS
date
Settlement date = Compare BS date forward rate and Settlement date Spot rate

Problem 4 Buyers Point of View


2020 Hedge Item Buyers Point of View (spot rate)
Dec.1 41.40
Dec.31 42.30
Increase in Accounts Payable - loss (0.90)
x Foreign Currency 14,100
Forex loss on hedge item (12,690)

Monetary Item Accounts Payable 42.30 x 14,100 = 596,430


2020 Hedge Instrument (future rate)
120 day rate Dec. 1 42.20
90 day rate Dec. 31 42.50
Increase in Future Contract Receivable - Gain 0.30
x Foreign Currency 14,100
Forex gain on hedge item 4,230

Net Forex Loss 12,690 loss (hedge item) + 4,230 gain (hedge instrument) = net loss 8,460
Or .9 loss - .3 gain = .6 net loss x $14,100 = 8,460 net loss

Problem 5 FIRM COMMITMENT


1. Purchase Commitment (Hedge Item) - Buyers Point View
Nov. 2 40
Dec.31 33
Decrease in Liability - Gain 7
x Foreign Currency 4,375
Forex Gain on hedge item 30,625

Under Firm Commitment transaction use the forward or future rate since there is no actual
shipment or delivery of goods.

2. The Equipment account will be recorded on the date of shipment or delivery, which is March 31,
2021 using the forward rate on the date of transaction. 40 x 4,375 yen = 175,000

Problem 6 FIRM COMMITMENT SELLERS POINT OF VIEW


1. Use the Forward rates
Nov. 1 90 day buying rate 11
Dec. 31 30 day buying rate 15
Increase in Accounts Receivable - gain 4
x Foreign Currency 10,000
Forex Gain on hedge item 40,000

2.
Dec. 31 30 day buying rate 15
Jan. 30 Buying spot rate 12
Decrease in Forward Contract Payable - Gain 3
x Foreign Currency 10,000
Forex Gain on hedge item 30,000

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