Foreign exchange rates

Foreign exchange rates

1. Reporting FOREX transactions in functional currency

   • Monetary items (MI)
     • All current assets (excl. inventory) & liabilities; LT-borrowings; Debentures; Deferred tax; Some employee benefits; Div. payable; Convertible pref. shares (into debentures); Convertible debentures (into redeemable pref. shares)
   • Non-monetary items (NMI)
     • Inventories; PPE; Investment in ordinary shares; Ordinary shares; PMTS in Advance; Goodwill; Intangible assets; Reserves; Convertible pref. shares & debentures (convert to ordinary shares)
   • Uncovered transactions: recorded in functional currency using spot rate at transaction date
   • Transaction date: Date when risks & rewards of ownership are transferred to purchaser

2. Covered transactions

   • Firm commitment = binding agreement for the exchange of a specified quantity of resources at specific price & future date
   • Forecast transaction = uncommitted but anticipated future transaction
   • Hedging instrument = designated derivative (hedge of risk of change in forex rates only); OR = designated non-derivative fin. asset; OR = non-derivative fin. liability whose fair value / CFj are expected to offset changes in the FV / CFj of a desinated hedged item

3. Uncovered transactions

   • At spot rate t.i.a: >MI recorded at closing spot rate at year end [ gives rise to FOREX G/L ]; >NMI recorded at spot rate always

4. Hedge accounting

   • Criteria to hedge: (Only if ALL are met)
     • > At inception of hedge item there is a formal designation & documentation of the hedging relationship; > Hedge is expected to be highly effective; > For CFj hedges, a forecast transaction MUST be highly probable & present an exposure to variations in cash flows that effect P/L; > Effectiveness of hedge reliably measured; > Hedge is assessed on an ongoing basis.
   • Fair value hedge
     • Underlying transaction present
     • Steps to account
       • 1. Entering into FEC = No transaction recorded; 2. IF YR/END AFTER SETTLEMENT = G/L on settlement of FEC the diff between MI recorded at spot rate on settlement date & amount paid/received ito FEC; 3. IF YR/END IS BEFORE SETTLEMENT = G/L on FEC is diff between contracted forward rate & contract forward rate of Similar FEC for remaining period until maturity; 4. IF FEC IS RENEWED OR ROLLED FORWARD = on maturity date recognise G/L on FEC as that between original forward rate & spot rate at that date.
   • Cash flow hedge
     • No underlying transaction
     • Steps to account
       • 1. Entering into FEC = No transaction recorded; 2. When UT is recorded OR YR/END reached, value of FEC = Foreign currency X [ Contracted forward rate less similar FEC on remaining period rate ] ; 3. Decide IF hedge effective, recognise G/L in SCE, IF ineffective, recognise G/L in P/L
         • IF recognised in SCE :
           • Fin. asset/liability recognised: >G/L recogn. directly in Equity is reclassified to I/S in period the A/L affects I/S ; > any unrecoverable amount is recogn. in I/S if entity expects all/portion of loss recogn. in E will not be recovered in future.
           • Non-financial asset/liability or firm commitment: >G/L recogn. directly in Equity is reclassified to I/S in period the A/L affects I/S ; OR reclassify G/L to asset/ liability so covered.

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