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Latest IAS 39 treatment on forward contracts

9 January 2010 344 views 5 Comments

Hello to all IFRS expert,

I would like to clarify the IAS 39 accounting entries for a forward contract.

My company currently open LC for purchase of machinery from japan for our trading business on 11 March 2010. Due to forex volatility, we entered into a forward contract for Japanese Yen. Say the yen amount is JPY25,000,000 @ 3.789 (for malaysia) maturity on 10 January 2011.

What is the double entry ? Is it correct that we debit financial assets at RM947,250 (Yen x 3.789/100) and credit financial liability RM947,250 at the same time once we entered into the forward contract ? Or don’t recognized it in the balance sheet, but instead only measure it at fair value or mark to market whereby the differences go to PnL a/c and inventory from time to time before the contract mature.

Thanks.

Regards,

Michael

5 Comments »

cmanishiyer said:

Dear Micheal,

If the forward is a market transaction, then you need to recognise the forward contract on inception at fair value that is zero. Changes in fair value can be loaded to the cost of inventory only when the conditions for hedging are satisfied.

Regards,
FCA Manish
+919825286903

# 11 January 2010 at 5:11 am

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# 12 January 2010 at 12:38 am

riyer said:

Hi Michael,

Let’s look at all the possible scenarios’

Scenario 1- you don’t follow hedge accounting and goods are yet to be received

Entry required- The forward contract is marked to market.

Scenario 2- You follow hedge accounting and goods are yet to be received

Entry required- The forward contract is marked to market and the change in fair value of firm committment is also recognised in the books of account.

Scenario 3- You either follow or don’t hedge accounting and goods are received

Entry required- The forward contract is marked to market and the exhange gain or loss on restatement of forex liability is also recognised in the books of account.

Under no circumstances, the loss or gain on forward contracts or the forex liability can be recognised in inventory. It will always be to the P&L account.

Hope this clarified. Do mail me at hramak@rediffmail.com if you wish to discuss further.

# 12 January 2010 at 5:55 am

C.CHANDRASEKHAR said:

WITH REFERENCE TO THE COMMENT OF RIYAR -for non-financial assets, the loss or gain in the fair value of on forward contract earlier recognised in the equity may be transferred and added to the initial cost / carrying value of the asset, as soon as the asset is recognised, provided the accounting policy of the entity allows the treatment – in other words, the loss or gain in the fair value of the forward contract can be capitalised.(IAS para 98-99)

# 13 January 2010 at 6:34 am