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

Under AS 11, a forward exchange contract is entered into by an enterprise not for trading or speculation but to establish the amount of reporting currency required or available at the settlement date of a transaction. How should the premium or discount arising at the inception of the contract be treated?

The premium or discount on a hedging forward exchange contract is amortised as expense or income over the life of the contract. It is not ignored, which applies only to trading or speculative contracts, and it is not recognised in full at inception.

  1. AIgnored completely and never recognised
  2. BAmortised as expense or income over the life of the contractCorrect
  3. CRecognised fully as income on the date of inception
  4. DAdjusted against the carrying amount of the related fixed asset only

Explanation

For a hedging forward contract, the premium or discount arising at inception is amortised as expense or income over the life of the contract. Ignoring it applies to contracts held for trading or speculation. Recognising it fully at inception is not permitted for a hedging contract.

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