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Could you provide the answer the for Examples 2 & 3 in the lecture notes under the Hedging
Example 2 – Cash flow hedge
Box Co. has ordered an item of property plant and equipment from an overseas supplier for
delivery early next year. Box’s functional currency is the USD and the property, plant and
equipment is to be purchased at €1.1 million.
A forward contract has been entered with a view to using it as a means to hedge against any
fluctuation in the exchange rates.
Exchange rates are as follows:
At order date €1.1:$1
At reporting date €1.05:$1
Required
(a) If Box does not designate the forward contract as a hedging instrument and no hedge
accounting is applied, explain the accounting treatment of the forward and future
purchase of PPE.
(b) If Box designates the forward contract as a hedging instrument and apples hedge
accounting, explain the accounting treatment of the forward and future purchase of
PPE.Example 3 – Fair value hedge
Laurel Co. owns 1,000 tonnes of gold inventory which is recorded in the financial statements at
$15,000 at 1 June 20X6
It is concerned about the fall in value of gold and entered into a futures contract to sell 1,000
tonnes of gold at $18,000 on 1 August 20X6.
At the reporting date of 30 June 20X6, the market value of gold was $16,500 and the futures price
for delivery on 1 August 20X6 was $19,500.
Required
(a) If Laurel adopts the hedge accounting rules of IAS 39, what is the accounting entry at
the reporting date to reflect the change in the value of the gold inventory?
(b) If Laurel adopts the hedge accounting rules of IAS 39, what is the accounting entry at
the reporting date to reflect the changes in the value of the gold future?Hi ,
The answer to Box and co is is available but not on the video lectures which would have been useful.
However my question is how come 47616 is stated as gain! Box have to
Pay more at the reporting date as the exchange rate is 1.05. And no forward contract too. Do we assume forward contract ?Thanks.
@hazeem said:
Could you provide the answer the for Examples 2 & 3 in the lecture notes under the HedgingExample 2 – Cash flow hedge
Box Co. has ordered an item of property plant and equipment from an overseas supplier for
delivery early next year. Box’s functional currency is the USD and the property, plant and
equipment is to be purchased at €1.1 million.
A forward contract has been entered with a view to using it as a means to hedge against any
fluctuation in the exchange rates.
Exchange rates are as follows:
At order date €1.1:$1
At reporting date €1.05:$1
Required
(a) If Box does not designate the forward contract as a hedging instrument and no hedge
accounting is applied, explain the accounting treatment of the forward and future
purchase of PPE.
(b) If Box designates the forward contract as a hedging instrument and apples hedge
accounting, explain the accounting treatment of the forward and future purchase of
PPE.Example 3 – Fair value hedge
Laurel Co. owns 1,000 tonnes of gold inventory which is recorded in the financial statements at
$15,000 at 1 June 20X6
It is concerned about the fall in value of gold and entered into a futures contract to sell 1,000
tonnes of gold at $18,000 on 1 August 20X6.
At the reporting date of 30 June 20X6, the market value of gold was $16,500 and the futures price
for delivery on 1 August 20X6 was $19,500.
Required
(a) If Laurel adopts the hedge accounting rules of IAS 39, what is the accounting entry at
the reporting date to reflect the change in the value of the gold inventory?
(b) If Laurel adopts the hedge accounting rules of IAS 39, what is the accounting entry at
the reporting date to reflect the changes in the value of the gold future?@cima1000 said:
Hi,
There is a gain on the forward as with the forward contract we will be paying less using the $1.1 rate as opposed to the $1.05 rate on the open market. You correctly state that we are paying more to by the PPE at the open market rate, so effectively we are making a loss on the open market and therefore there is a gain on the hedging instrument.
Thanks
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