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

Nirmal Ltd entered into a forward contract on 1 January 2025 to sell USD 10,000 on 30 June 2025. The spot rate on 1 January 2025 was Rs 83 and the forward rate was Rs 85. The contract is for hedging a receivable existing at that date, not a speculative one. The year ends on 31 March 2025. What is the premium on the forward contract and how is it treated in FY 2024-25 as per AS 11?

The premium is Rs 20,000, being (85 - 83) x 10,000, and it is amortised over the six-month contract. Three months fall in FY 2024-25, so Rs 10,000 is recognised in that year and the balance Rs 10,000 in the next year.

  1. APremium Rs 20,000, amortised over the contract life; Rs 10,000 recognised in FY 2024-25Correct
  2. BPremium Rs 20,000, recognised wholly in FY 2024-25
  3. CPremium Rs 20,000, recognised wholly in FY 2025-26
  4. DPremium Rs 8,30,000, amortised over the contract life

Explanation

Premium is the difference between the spot rate and the forward rate: (85 - 83) x 10,000 = Rs 20,000. For a hedging forward contract, it is recognised over the life of the contract. The contract runs 1 January to 30 June, 6 months, of which 3 months fall in FY 2024-25, so 20,000 x 3/6 = Rs 10,000. Recognising all of it in one year disregards the amortisation requirement.

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