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

Kaveri Exports Ltd. had a receivable of USD 50,000 arising on 1 January when the spot rate was ₹80. On the same day it entered a forward contract to sell USD 50,000 on 30 April at ₹82.40, to hedge this receivable (not for trading or speculation). The reporting date is 31 March. How much of the forward premium or discount should be recognised in the profit and loss for the year ending 31 March, as per AS 11?

₹90,000 of income is recognised. The premium is (82.40 − 80) × 50,000 = ₹1,20,000, and for a hedging forward contract it is amortised over the contract's four-month life. Three months fall in the current year, so ₹30,000 × 3 = ₹90,000.

  1. AIncome of ₹1,20,000, being the whole premium
  2. BIncome of ₹90,000Correct
  3. CIncome of ₹30,000
  4. DNil, as it is recognised only on settlement

Explanation

Premium = (82.40 − 80) × 50,000 = ₹1,20,000. For a hedging forward contract, the premium is amortised over the life of the contract (1 Jan–30 Apr, 4 months), i.e. ₹30,000 per month. For 3 months up to 31 March, the amount is ₹90,000. Recognising the full ₹1,20,000 ignores the amortisation, and recognising nothing delays recognition until settlement.

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