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

Under AS 11, how is any profit or loss arising on cancellation or renewal of a forward exchange contract that is a hedge (not for trading or speculation) treated?

Any profit or loss on cancellation or renewal of a hedging forward exchange contract is recognised as income or expense for the period in which it arises. It is not deferred to the original maturity date or taken to reserves.

  1. ARecognised as income or as expense for the periodCorrect
  2. BCarried forward as a deferred asset until the original maturity date
  3. CAdjusted against reserves directly
  4. DAdded to the cost of the underlying transaction regardless of its nature

Explanation

AS 11 requires any profit or loss arising on cancellation or renewal of such a forward exchange contract to be recognised as income or as expense for the period. Deferring it to maturity or adjusting reserves is not allowed by the standard.

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