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

A forward exchange contract is held purely for trading or speculation. Which treatment does AS 11 require at the balance sheet date?

For a forward contract held for trading or speculation, the premium or discount is ignored. At each balance sheet date the contract is marked to its current market value, and the resulting gain or loss is recognised in the period.

  1. AAmortise the premium over the contract life and ignore the market value
  2. BDefer any gain or loss until the contract is settled
  3. CIgnore the premium or discount, mark the contract to its current market value and recognise the gain or lossCorrect
  4. DRecognise only losses and ignore unrealised gains

Explanation

For trading or speculation contracts, the premium or discount is ignored. At each balance sheet date the contract is marked to its current market value and the gain or loss is recognised. Amortising the premium applies to hedging contracts.

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