Financial Accounting · The Effects of Changes in Foreign Exchange Rates (AS 11)

Forward Exchange Contracts under AS 11: Accounting and Problems

Updated 10 October 2026 · Fact-checked

A forward exchange contract fixes a future rate for foreign currency. Under AS 11, for a hedge, split the forward-minus-spot gap on the contract date into premium or discount and spread it over the contract's life. Take exchange differences and cancellation gains or losses to the statement of profit and loss.

Understand Forward Exchange Contracts

A forward exchange contract is an agreement with a bank to buy or sell a fixed amount of foreign currency on a future date at a rate fixed today. An exporter expecting US dollars in three months can lock in the rupees it will receive. An importer who must pay dollars later can lock in the rupees it will pay.

AS 11 first asks why you entered the contract. If it is to hedge (to fix the rupee amount of a transaction or balance you already have), AS 11 splits the contract into two parts. The first part is the premium or discount, which is the difference between the spot rate on the contract date and the forward rate. The second part is the exchange difference, which arises from movements in the spot rate after the contract date.

The premium or discount is not a gain or loss on day one. It is the cost or benefit of fixing the rate over time. So you amortise it as expense or income over the life of the contract, usually on a time basis. The exchange difference goes to the statement of profit and loss in the period in which the rates change. It is measured as the foreign currency amount translated at the spot rate on the reporting or settlement date, less the same amount translated at the spot rate on the later of the contract date and the last reporting date. It normally offsets the exchange difference on the underlying receivable or payable.

If the contract is for trading or speculation, the premium or discount is not recognised separately. At each reporting date you compare the forward rate available for the remaining maturity with the contract rate. You multiply the difference by the foreign currency amount and take the gain or loss to the statement of profit and loss. The direction of the comparison depends on whether you bought or sold the currency.

If a hedge contract is cancelled or renewed, any profit or loss on that cancellation or renewal is recognised as income or expense of the period in which it happens. Premium or discount amortisation continues only while the contract is alive.

Key rules to remember

Premium or discount on a hedge contract: (Forward rate − Spot rate on contract date) × Foreign currency amount; This is a premium if the forward rate is higher than spot and a discount if it is lower. Whether it is income or expense depends on whether you are the buyer or seller of the foreign currency. An exporter selling at a premium earns income; an importer buying at a premium bears expense.
Amortisation of premium or discount: Total premium or discount × (Months elapsed in the period ÷ Total months of contract); Spread it over the contract's life. Use the same period split as the financial year-end cuts the contract.
Exchange difference on the forward contract: Foreign currency amount × (Spot at reporting or settlement date − Spot at inception or last reporting date, whichever is later); Recognise it in the statement of profit and loss for the period. This is separate from the premium or discount, which is the other component. For a contract to sell foreign currency, a rising spot rate gives a loss on the contract. For a contract to buy, a rising spot rate gives a gain.
Gain or loss on a speculative contract: Buy contract: Foreign currency amount × (Forward rate for the remaining maturity − Contract rate). Sell contract: Foreign currency amount × (Contract rate − Forward rate for the remaining maturity); A positive result is a gain and a negative result is a loss. The sign is reversed for a sell contract, so check your position first. No separate premium or discount. Recognise the result in the statement of profit and loss for the period.
Cancellation or renewal: Profit or loss on cancellation or renewal = income or expense of the period in which it occurs; Take the figure from the question's cancellation rate and contract data. Do not amortise premium or discount after the contract ends.
Rupee amount actually realised or paid on a hedge: Foreign currency amount × Forward rate; Use it to check your answer. The original transaction value plus the premium income, or less the premium expense, should equal this amount.

How to solve Forward Exchange Contracts questions

Use this order for any forward contract problem. It keeps premium, exchange difference and cancellation separate, and that is where the step marks are.

1Read the purpose first. Decide whether the contract is a hedge of an existing receivable or payable, or a speculative contract. The accounting is different.
2List the dates and rates: transaction date, contract date, due date, financial year-end, and the spot and forward rates at each date.
3For a hedge, compute the total premium or discount as (Forward rate − Spot at contract date) × foreign currency amount. Mark it as income or expense from your position, buyer or seller.
4Amortise it over the contract life on a time basis. Allocate the part falling in each financial year.
5Compute the exchange difference on the receivable or payable and, separately, on the forward contract. Use inception date or last reporting date as the base, whichever is later.
6If the contract is cancelled or renewed, compute the profit or loss on cancellation and recognise it in the period in which it occurs. Stop amortisation from that date.
7Pass journal entries, or show the statement of profit and loss effect, for each period. Then verify the final cash against foreign currency amount × forward rate.

Quickest way: Rate-gap shortcut for hedge contracts

When to use it: Use it when the question asks only for the statement of profit and loss effect or the final rupee amount of a hedge contract, not full journal entries.

Compute the total premium or discount once: (Forward − Spot at contract date) × amount.
Divide it by total months and multiply by months in the year. This gives the income or expense for that period.
Note that the exchange difference on the hedge contract offsets that on the receivable or payable if both start at the same spot rate. State this and show both figures.
Check the end result: cash = amount × forward rate. If it does not agree with the original value plus or minus the premium or discount, find the error before moving on.

Common mistakes in Forward Exchange Contracts

Treating the whole forward-minus-spot gap as a gain or loss on the contract date
Students remember that forward rate differs from spot and book it immediately.
Fix: For a hedge, the gap is premium or discount. Amortise it over the contract life and recognise only the part belonging to each period.
Using the forward rate to translate the receivable or payable at the year-end
Students assume the hedge changes the translation rate.
Fix: Translate the receivable or payable at the closing spot rate as AS 11 requires. The effect of the hedge is shown through the exchange difference on the contract and the premium or discount.
Getting the sign of the exchange difference on the contract wrong
Students forget the contract position is opposite to the underlying item.
Fix: A sell contract loses when the spot rate rises, and a buy contract gains. The contract's exchange difference is usually opposite to the underlying item's.
Measuring the exchange difference from the contract date every year
Students ignore the 'whichever is later' rule.
Fix: In later years, measure from the last reporting date rate, not the original inception rate.
Mixing up hedging and speculative treatment
Both involve forward contracts, so students use one method for all.
Fix: Hedge: amortise premium or discount and recognise the exchange difference. Speculative: compare the forward rate for remaining maturity with the contract rate and recognise the gain or loss, with no premium or discount split. For a buy contract use (forward − contract rate); for a sell contract use (contract rate − forward).
Continuing to amortise premium after cancellation
Students keep the original schedule running.
Fix: Stop amortisation at the date the contract is cancelled. Recognise the cancellation profit or loss separately in the period of cancellation.

Worked examples

Example 1

Aarav Exports Ltd sold goods to a US buyer for US$50,000 on 1 January 2027, when the spot rate was ₹83.00. On the same day it entered a forward contract to sell US$50,000 on 30 April 2027 at ₹84.20, to hedge the receivable. The year-end is 31 March. The spot rate on 31 March 2027 was ₹83.60 and on 30 April 2027 was ₹84.00. Show the effect on the statement of profit and loss for each period and the cash received.

Show the solution

Sale value on 1 January 2027 = US$50,000 × ₹83.00 = ₹41,50,000.
Premium = (₹84.20 − ₹83.00) × 50,000 = ₹60,000. Aarav sells dollars at a rate above spot, so this is income. The contract runs 4 months, so ₹15,000 per month.
FY 2026-27 premium income: 3 months (January to March) = ₹45,000. FY 2027-28 premium income: 1 month (April) = ₹15,000. The premium is a separate component from the exchange differences below.
Exchange difference on the receivable at 31 March 2027 = 50,000 × (83.60 − 83.00) = ₹30,000 gain.
Exchange difference on the forward contract at 31 March 2027: AS 11 measures it as foreign currency amount × (spot at reporting date − spot at the later of contract date and last reporting date). The base is the contract date, 1 January 2027. So 50,000 × (83.60 − 83.00) = ₹30,000, and it is a loss since it is a sell contract and the spot rate rose. Net exchange difference = nil.
At 30 April 2027 (settlement), the base for both items is the last reporting date, 31 March 2027, spot ₹83.60. The receivable shows a further gain of 50,000 × (84.00 − 83.60) = ₹20,000. The contract shows a loss of 50,000 × (84.00 − 83.60) = ₹20,000. Net = nil.
Cash received = US$50,000 × ₹84.20 = ₹42,10,000.
Check: ₹41,50,000 + ₹60,000 premium = ₹42,10,000. This agrees.

Answer: Statement of profit and loss: FY 2026-27 shows premium income of ₹45,000 and net exchange difference nil (receivable gain ₹30,000 offset by contract loss ₹30,000). FY 2027-28 shows premium income of ₹15,000 and net exchange difference nil (receivable gain ₹20,000 offset by contract loss ₹20,000). Cash received is ₹42,10,000.

Example 2

Meera Traders purchased goods from a US supplier for US$40,000 on 1 February 2027, when the spot rate was ₹82.50. On the same day it entered a forward contract to buy US$40,000 on 1 June 2027 at ₹82.10 to hedge the payable. The year-end is 31 March 2027, when the spot rate was ₹82.90. Show the effect on the statement of profit and loss for the year ended 31 March 2027 and the rupees payable on 1 June 2027.

Show the solution

Purchase value on 1 February 2027 = US$40,000 × ₹82.50 = ₹33,00,000.
Discount = (₹82.10 − ₹82.50) × 40,000 = ₹16,000. Meera buys dollars below spot, so this is income. The contract runs 4 months, so ₹4,000 per month.
Discount income for FY 2026-27: 2 months (February and March) = ₹8,000. The balance ₹8,000 belongs to FY 2027-28.
Exchange difference on the payable at 31 March 2027 = 40,000 × (82.90 − 82.50) = ₹16,000 loss, as the liability has increased.
Exchange difference on the forward contract at 31 March 2027, measured from the contract date (the later of contract date and last reporting date) = 40,000 × (82.90 − 82.50) = ₹16,000 gain, since it is a buy contract and the spot rate rose.
Net exchange difference for FY 2026-27 = nil.
Rupees payable on 1 June 2027 = US$40,000 × ₹82.10 = ₹32,84,000.
Check: ₹33,00,000 − ₹16,000 discount = ₹32,84,000. This agrees.

Answer: For the year ended 31 March 2027, the statement of profit and loss shows discount income of ₹8,000, with the payable loss of ₹16,000 offset by the contract gain of ₹16,000, so the net exchange difference is nil. Meera pays ₹32,84,000 on 1 June 2027.

Exam tips

Write the purpose of the contract in your first line: hedge or speculative. Examiners award marks for choosing the correct treatment.
Show the premium or discount calculation as a separate line with months, so you earn marks even if a later figure goes wrong.
Present the exchange difference on the underlying item and the forward contract side by side to show that they offset. Then state the net effect.
In MCQs, check the position first, buyer or seller of foreign currency, before deciding whether the premium is income or expense, or which way a speculative gain or loss runs.
For cancellation or renewal questions, state the date on which amortisation stops and recognise the profit or loss in that period only.

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

Forward Exchange Contracts 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: frequently asked questions

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

A hedging contract fixes the rupee value of an existing or committed transaction. Its premium or discount is amortised over the contract life and exchange differences go to profit or loss. A speculative contract is taken for trading. It has no separate premium or discount, and the gain or loss is measured against the forward rate for the remaining maturity. For a buy contract the gain is (forward rate − contract rate) × amount, and for a sell contract it is (contract rate − forward rate) × amount.

How is forward premium or discount amortised under AS 11?

First compute the total as the difference between the forward rate and the spot rate on the contract date, multiplied by the foreign currency amount. Then recognise it as expense or income over the life of the contract, usually on a time basis. Allocate to each financial year the months that fall in it.

Where does the exchange difference on a forward contract go?

It goes to the statement of profit and loss for the period in which the exchange rates change. For a hedge, it is measured from the spot rate at the contract date or the last reporting date, whichever is later. It usually offsets the exchange difference on the receivable or payable.

What happens to profit or loss when a forward contract is cancelled or renewed?

The profit or loss on cancellation or renewal is recognised as income or expense of the period in which the cancellation or renewal takes place. Premium or discount amortisation stops when the contract ends. Use the cancellation figures given in the question.