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

Arvind Exports Ltd. entered into a forward contract on 1 January 2026 to sell USD 20,000 on 30 June 2026 at ₹84.00 per USD. The contract is not meant to hedge any asset, liability or commitment. At the balance sheet date, 31 March 2026, the forward rate for the remaining period to 30 June 2026 is ₹84.90 per USD. What is the correct accounting for the year ended 31 March 2026 under AS 11?

A forward contract that is not a hedge is marked to market at the balance sheet date using the forward rate for the remaining period. The company sells at 84.00 while the market rate is 84.90, so the loss is 20,000 × 0.90 = ₹18,000, recognised in profit and loss.

  1. AGain of ₹18,000 recognised in profit and loss
  2. BLoss of ₹18,000 recognised in profit and lossCorrect
  3. CLoss of ₹9,000 recognised, being half of the difference
  4. DNo recognition until the contract is settled on 30 June 2026

Explanation

A forward contract that is not for hedging is marked to market at the balance sheet date using the forward rate for the remaining maturity. The company agreed to sell at 84.00 while the current forward rate is 84.90, so it loses 0.90 per USD. Loss = 20,000 × 0.90 = ₹18,000, recognised in profit and loss. Deferring recognition until settlement is not permitted for such contracts.

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