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

A company enters a forward contract to sell USD 10,000. The spot rate at inception is Rs 82.00 and the forward rate in the contract is Rs 83.50. Under AS 11, the premium or discount arising at inception is:

The premium is Rs 15,000, being (83.50 minus 82.00) multiplied by USD 10,000. AS 11 measures it as the difference between the inception spot rate and the forward rate, and requires it to be accounted for separately from exchange differences on the contract.

  1. APremium of Rs 15,000, accounted for separately from exchange differences on the contractCorrect
  2. BDiscount of Rs 15,000, accounted for separately from exchange differences
  3. CPremium of Rs 15,000, merged with exchange differences at the reporting date
  4. DPremium of Rs 8,200, based on the spot rate

Explanation

Premium or discount is measured as the difference between the inception spot rate and the contract forward rate: (83.50 - 82.00) x 10,000 = Rs 15,000. Since the forward rate exceeds spot, it is a premium. AS 11 requires it to be accounted for separately from exchange differences, so merging it is wrong.

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