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

Vinayak Exports Ltd, whose year ends on 31 March, has a USD 20,000 receivable. On 1 February it enters a 4-month forward contract (maturing 31 May) to sell USD 20,000 at Rs 84.00 per USD, to hedge the receivable. The spot rate on 1 February is Rs 83.00. The contract is not for trading or speculation. What amount of the premium on the contract is recognised as income in the year ending 31 March?

Rs 10,000 is recognised. The premium is the difference between forward and spot rate times the amount, Rs 1 x 20,000 = Rs 20,000. AS 11 requires this premium on a hedging contract to be amortised over the contract's life, and two of four months fall in the year, giving half.

  1. ARs 10,000Correct
  2. BRs 20,000
  3. CRs 5,000
  4. DRs 30,000

Explanation

Premium = (84.00 - 83.00) x 20,000 = Rs 20,000. Under AS 11 the premium on a hedging forward contract is amortised over the life of the contract. The contract runs 4 months and 2 months fall in the year, so 20,000 x 2/4 = Rs 10,000. Recognising the full premium ignores the amortisation requirement.

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