Advanced Accounting · AS 11 The Effects of Changes in Foreign Exchange Rates

Forward Exchange Contracts under AS 11: Hedging and Speculative Accounting

Updated 4 October 2026 · Fact-checked

A forward exchange contract fixes a future exchange rate. Under AS 11, if it hedges an existing asset or liability, split the gap between forward and spot rate at inception as premium or discount and amortise it over the contract life. If it is speculative, mark it to the forward rate at each balance sheet date.

Understand Forward Exchange Contracts under AS 11

A forward exchange contract is an agreement to buy or sell a stated amount of foreign currency on a future date at a rate fixed today. The fixed rate is the forward rate. The rate for immediate delivery is the spot rate.

The forward rate usually differs from the spot rate on the day you sign. That difference, multiplied by the foreign currency amount, is the premium (forward rate above spot) or discount (forward rate below spot). AS 11 asks one question first: why did the entity enter the contract?

Hedging (not for trading or speculation): the entity wants to fix the rupee amount for an existing asset or liability, such as an import payable or an export receivable. Here the premium or discount is a cost or income of the contract's life. You amortise it to the statement of profit and loss over the contract period. You also recognise the exchange difference on the contract each period. It is the foreign currency amount multiplied by the change in spot rate. It offsets the exchange difference on the underlying item.

Speculative or trading: the entity is betting on rates. You do not split out any premium or discount. At each balance sheet date, compare the forward rate for the remaining maturity with the contracted forward rate. Take the difference to the statement of profit and loss as a gain or loss.

In both cases, a gain or loss on cancellation or renewal is recognised as income or expense of the period in which it occurs. AS 11 does not cover forward contracts that hedge a firm commitment or a highly probable forecast transaction. Do not apply this method to such contracts unless the question tells you to.

Key rules to remember

Premium or discount on a hedging contract: FC amount × (Forward rate − Spot rate on inception date); Positive = premium, negative = discount. Spot rate is the rate on the date the contract is made.
Amortisation of premium or discount: Total premium or discount × (months or days elapsed in the period ÷ total contract period); Charge premium as expense and discount as income. Use the same time basis (months or days) that the question gives.
Exchange difference on a hedging contract: FC amount × (Spot rate at settlement or balance sheet date − Spot rate at inception or previous balance sheet date, whichever is later); Recognised in the statement of profit and loss for the period. For a contract to buy FC, a rise in spot rate gives a gain. For a contract to sell FC, a rise gives a loss.
Speculative contract: gain or loss at balance sheet date: FC amount × (Forward rate available at balance sheet date for remaining maturity − Contracted forward rate); Sign depends on direction. Buyer of FC gains if the new forward rate is higher. Seller of FC gains if the new forward rate is lower.
Cancellation or renewal: Gain or loss = FC amount × difference between contract rate and the rate at which it is cancelled or renewed; Recognised in the statement of profit and loss of the period of cancellation or renewal.

How to solve Forward Exchange Contracts under AS 11 questions

Use this order for any forward contract question. It keeps hedging and speculative cases from mixing.

1Read the purpose. Is the contract linked to an existing asset or liability (hedging) or is it for trading or speculation? Note the direction: buying or selling foreign currency.
2List the dates and rates: inception date, balance sheet date, settlement date, spot rates on each, forward rates, and the contracted forward rate.
3For a hedging contract, compute premium or discount at inception: FC amount × (forward rate − spot rate at inception).
4Split the premium or discount over the contract life by time. Charge the share up to the balance sheet date to the current year and the rest to the next year.
5Compute the exchange difference on the contract for each period using spot rates, and the exchange difference on the underlying asset or liability. Check that they offset each other.
6For a speculative contract, ignore premium or discount. At the balance sheet date, compare the forward rate for the remaining period with the contracted rate. At settlement, recognise the balance of the total gain or loss.
7If there is a cancellation or renewal, compute the gain or loss against the contract rate and take it to the statement of profit and loss of that period.
8Show the effect on profit or loss for each year and pass journal entries if asked.

Quickest way: Four-line check for hedging and speculative contracts

When to use it: Use this when you have limited time, for example in a 1-mark or 2-mark MCQ or a short written part.

Underlying item present? If yes, it is hedging. Premium or discount = FC × (forward − spot at inception). If no, it is speculative, so use forward rate versus contract rate.
For hedging, total cost over the life equals the premium. The rupee amount actually paid or received is FC × forward rate. Use this to cross-check your answer.
For MCQs, eliminate options that recognise premium fully in year one when the contract spans two years, and options that amortise a premium for a speculative contract.
In written answers, use headed workings: Premium or discount, Amortisation, Exchange difference, Net effect on profit or loss. Show each formula with numbers. Step marks follow the working, so never write only the final figure.

Common mistakes in Forward Exchange Contracts under AS 11

Using the closing spot rate to compute premium or discount.
Students rush to the balance sheet date figures.
Fix: Premium or discount always uses the spot rate on the inception date of the contract, compared with the forward rate fixed that day.
Writing off the whole premium in the first year when the contract runs into the next year.
The premium is known on day one, so it feels like a day-one expense.
Fix: Amortise over the contract life by time. Only the elapsed share goes to the current year.
Amortising premium or discount on a speculative contract.
Students apply the hedging method to every contract.
Fix: For speculative contracts there is no separate premium or discount. Use the forward rate for the remaining maturity at the balance sheet date against the contracted rate.
Getting the sign of the exchange difference wrong for buy versus sell contracts.
Students memorise 'rise = gain' without checking the direction.
Fix: Ask: who gains if the foreign currency becomes more expensive? A buyer of FC under the contract gains. A seller of FC loses. Reverse it when FC falls.
Taking the exchange difference from the original inception rate every year.
Students forget that the base moves to the previous balance sheet date.
Fix: In the second period, measure from the spot rate at the previous balance sheet date, not from inception.
Treating a gain or loss on cancellation as part of the cost of the asset or as deferred.
Students link the contract to the underlying purchase.
Fix: A gain or loss on cancellation or renewal is recognised as income or expense of the period in which it occurs.

Worked examples

Example 1

Alpha Ltd imports goods worth USD 30,000 on 1 February 2027, payable on 1 May 2027. On the same date it enters a forward contract to buy USD 30,000 on 1 May 2027 at ₹82.60. The aim is to hedge the payable. The financial year ends 31 March. Rates: spot on 1 February ₹82.00; spot on 31 March ₹82.30; spot on 1 May ₹82.50. Show the effect on the statement of profit and loss for each year. Treat the contract as 3 months and the amortisation as monthly.

Show the solution

Purpose: hedging of an existing payable, so split premium and amortise.
Premium = 30,000 × (82.60 − 82.00) = ₹18,000. It is an expense.
Amortisation to 31 March 2027 (2 of 3 months) = 18,000 × 2/3 = ₹12,000. Remaining ₹6,000 falls in the next year.
Year to 31 March 2027: loss on translating the payable = 30,000 × (82.30 − 82.00) = ₹9,000. Gain on the contract = 30,000 × (82.30 − 82.00) = ₹9,000. These offset.
Net charge for the year to 31 March 2027 = premium amortised ₹12,000 expense. Exchange differences net to nil.
Next year to 1 May 2027: loss on payable = 30,000 × (82.50 − 82.30) = ₹6,000. Gain on contract = ₹6,000. These offset.
Premium amortised in the next year = ₹6,000.
Cross-check: total cost = 12,000 + 6,000 = ₹18,000. Payable was ₹24,60,000 at inception. Amount paid under the contract = 30,000 × 82.60 = ₹24,78,000. Difference = ₹18,000. It matches.

Answer: Year to 31 March 2027: premium expense ₹12,000 with exchange differences netting to nil. Next year: premium expense ₹6,000 with exchange differences netting to nil. Total cost of hedging ₹18,000.

Example 2

Beta Ltd enters a forward contract on 1 February 2027 to sell USD 20,000 on 1 May 2027 at ₹83.00. The contract is purely speculative and is not linked to any asset or liability. On 31 March 2027, the forward rate for delivery on 1 May 2027 is ₹82.60. The spot rate on 1 May 2027 is ₹82.40. Compute the profit or loss to be recognised in each year.

Show the solution

Purpose: speculative. No separate premium or discount. Do not amortise.
At 31 March 2027, compare the forward rate for the remaining period with the contracted rate. Beta sells USD at ₹83.00 while the market forward rate is ₹82.60.
Gain at 31 March 2027 = 20,000 × (83.00 − 82.60) = ₹8,000. Recognise as a gain in the statement of profit and loss for the year to 31 March 2027.
On settlement on 1 May 2027, Beta sells at ₹83.00 while the spot rate is ₹82.40. Total gain on the contract = 20,000 × (83.00 − 82.40) = ₹12,000.
Gain already recognised = ₹8,000. Gain for the next year = 12,000 − 8,000 = ₹4,000.

Answer: Gain of ₹8,000 in the year to 31 March 2027 and a further gain of ₹4,000 in the next year, total ₹12,000.

Exam tips

Write the purpose of the contract in your first line: hedging or speculative. Many step marks depend on this classification.
Show the premium or discount formula with numbers and state whether it is an expense or income. Examiners look for this.
Always do an offset check for hedging: exchange difference on the contract should cancel against the exchange difference on the underlying item. If it does not, recheck the sign.
In MCQs on cancellation, pick the option that takes the gain or loss to the statement of profit and loss of the period. Reject options that defer it or adjust it against asset cost.
Use the time basis the question specifies; if it does not specify, amortise on a time-proportion basis (days if dates are given).

Practice questions from AS 11 The Effects of Changes in Foreign Exchange Rates

Forward Exchange Contracts under AS 11 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Forward Exchange Contracts under AS 11: frequently asked questions

What is the difference between hedging and speculative forward contracts under AS 11?

A hedging contract is made to fix the rupee value of an existing asset or liability. Its premium or discount is amortised over the life, and exchange differences are recognised each period. A speculative contract is made to gain from rate movements. There is no separate premium or discount, and it is marked to the forward rate at each balance sheet date.

How do I calculate premium or discount on a forward contract?

Multiply the foreign currency amount by the difference between the contracted forward rate and the spot rate on the inception date. If the forward rate is higher, it is a premium and an expense. If lower, it is a discount and income. Amortise it over the contract period.

How do I calculate profit or loss on a forward contract at the balance sheet date?

For a hedging contract, take the exchange difference as FC amount × change in spot rate, plus the amortised premium or discount. For a speculative contract, take FC amount × the difference between the forward rate for the remaining period and the contracted forward rate. Check the direction, buy or sell, to get the sign.

How is a gain or loss on cancellation of a forward contract treated?

It is recognised as income or expense in the statement of profit and loss of the period in which the contract is cancelled or renewed. It is not deferred over the original contract period.