- Chapter 11

Derivatives as Hedging Instrument

in Managing Foreign Currency Exposures

I. Introduction

Companies need to manage their risks. Management has to develop a variety of financial
instruments to manage their business risks. Those companies operating internationally are subject
not only to the normal business risks but are typically subject to additional risks from possible
changes in currency exchange rates because they are transacting in more than one currency.
Multinational entities manage their foreign currency risks by using one of several types of financial
instruments: (1) foreign currency forward contract: (2) foreign currency options, (3) foreign currency
futures and (4) foreign currency swops.

In this chapter, the discussion will focus on the three types of derivative financial instruments for
foreign currency: (1) forward contract. (2) options and (3) futures which ore commonly used to hedge
foreign currency exposures. Swaps will be discussed on the topic of interest-rate exposures.

II. Types of Derivatives

Derivatives derive their value from another underlying item such as a share price or an Interest rate.

Typical examples of derivatives are futures and forwards, swap and option contracts. A derivative
usually has a notional amount, which is a currency, a number of shares or other units specified in a
contract.

Derivatives can generally be categorized one of the following two categories:

1. Option-based derivatives (examples are option contracts, Interest rate caps, and interest rate
floors). Under these contracts, it has a "one-sided exposure wherein only one party can be
potentially have a favorable outcome for which it. pays a premium at Inception; the other party can
potentially have only an unfavorable outcome for which it is paid the premium at inception.
Consequently, only the downside risk on the hedged item is counterbalanced.

2. Forward-based derivatives (examples are forwards, futures, and swaps). Under these contracts, It
has a "two-sided exposure" wherein either party (but not both simultaneously) can potentially have a
favorable outcome and either party (but not both simultaneously) can have an unfavorable outcome.
Consequently, the downside risk and the upside potential on the hedged item are counterbalanced.
III. Accounting for Foreign Currency Derivatives and Hedging Activities

A hedging operation is the purchase or sale of foreign currency contracts to offset the risks of holding
receivables and payables denominated in a foreign currency. The usual way of avoiding risks on file
character of exchange rate is through forward contracts.

For derivatives instruments to quality as hedging instruments, the following two criteria must be met:

1. Sufficient documentation must be provided at the beginning of the hedge term to identify the
objective and strategy of the hedge, the hedging Instrument and the hedged Item, and how the hedge's
effectiveness will be assessed on an ongoing basis.

2. The hedge must be highly effective throughout its term. Effectiveness is viewed as the derivative
instrument's ability to offset changes in the fair value or cash flows of the hedged item within the range
between 80 and 125 percent of the change in value of the hedged item.

PFRS 9 introduce a substantially-reformed model for hedge accounting, with improved disclosures about
risk management activity.

Accounting for Hedges PFRS 9

Fair Value Hedge

What remains the same?

The risk being hedged in a fair value hedge is a change in the fair value of an asset or liability or an
unrecognized firm commitment that is attributable to a particular risk and could affect P&L. Changes in
fair value might arise through changes in interest rates (for fixed-rate lons), foreign exchange rates,
equity prices or commodity prices.

The carrying value of the hedged item is adjusted for fair value changes attributable to the risk being
hedged, and those fair value changes are recognized in P&L. The hedging instrument is measured at fair
value, with changes in the value also recognized in P&L.

What has changed?

For fair value hedges of an eqully instrument accounted for at fair value throuigh other comprehensive
Income (FVTOCI-since under IFRS 9. gains/losses of equity instruments are never recycled to P&L.
changes in the fair value of the hedging instrument are also recorded in OCI without recycling to P&L.

Cash Flow Hedge

What remains the same?

The risk being hedged in a cash flow hedge is the exposure to variability in cash flows that is attributable
to a particular risk associated with a recognized asset or liability, on unrecognized firm commitment
(currency risk only) or a highly probable forecast transaction and could affect P&L

Future cash flows might relate to existing assets and liabilities, such as future interest payments or
receipts on floating rate debit future cash flows can also relate to forecast sales or purchases in a foreign
currency.
Volatility in future cash flows might result from changes in Interest rates, exchange rates, equity prices or
commodity prices

Hedge Accounting

Provided the hedge is effective, changes in the fair value of the hedging instrument are Initially
recognized in OCI. The ineffective portion of the changes in the fair value of the hedging instrument (if
any) is recognized directly in P&L.

The amount recognized in OCI should be the lower of:

 The cumulative gain or loss on the hedging instrument from the inception of the hedge, and
 The cumulative change in the fair value (present value) of the expected cash flows on the
hedged item from the Inception of the hedge.

If the cumulative change in the hedging Instrument exceeds the change in the hedged Item (sometimes
referred to as an 'over-hedge'), Ineffectiveness will be recognized. If the cumulative change in the
hedging instrument is less than the change in the hedged Item (sometimes referred to as an 'under-
hedge'), no Ineffectiveness will be recognized. This is different from a fair value hedge, in which
ineffectiveness is recognized on both over and under hedges.

for cash flow hedges of a forecast transaction which result in the recognition of a financial asset or
liability, the accumulated gains and losses recorded in equity should be reclassified to P&L in the same
period or periods during which the hedged expected future cash flows affect P&L. Where Items is a
cumulative loss on the hedging Instrument and it is no longer expected that the loss will be recovered, It
must be immediately recognized In P&L.

What has changed?

IFRS 9 Introduces changes to the cash flow hedge accounting model, as follows:

 For cash flow hedges of a forecast transaction which results in the recognition of a non-financial
item (such as a fixed asset or Inventory), or where a hedged forecast transaction for non-
financial asset or a non-financial liability becomes a firm commitment for which fair value hedge
accounting is applied, the carrying value of that item must be adjusted for the accumulated gains
or losses recognized directly in equity (often referred to a 'basis adjustment').

Under PAS 39, the entity could elect as a policy choice, either the treatment described above or to
maintain the accumulated gains or losses in equity and reclassify them to P&L at the same moment that
the nonfinancial item affects P&L. This accounting policy choice is no longer allowed under IFRS 9.

 Where the net position of a group of items containing offsetting risk positions is designated on
the hedged item, the cash flow hedge model can only be applied to the hedge of foreign
currency risk. The designation of that net position must specify both the reporting period in
which the forecast transactions are expected to affect P&L and also the nature and volume that
are expected affect P&L In each period. Hedging gains or losses must be presented in a separate
line item in the income statement. PAS 39 did not allow net positions to be designated as the
hedged item.
 For cash flow hedges of a group of Items with no offsetting risk position, the presentation of
hedging gains or losses are apportioned to the line items affected by the hedged items. PAS 39
did not prescribe the presentation of gains or losses in P&L.
Net Investment hedge

What remains the same?

An entity might have overseas subsidiaries, associates, joint ventures or branches ('foreign operations). It
might hedge the currency risk associated with the translation of the net assets of these foreign
operations into the parent entity's functional currency.

The amount of a net investment in a foreign operation under PAS 21 is the reporting entity's interest in
the net assets of that operation, including any recognized goodwill. Exchange differences arising on the
consolidation of these net assets are deferred in equity until the foreign operation is disposed of or
liquidated. They are recognized on deposal or liquidation, as part of the gain or loss on disposal. in P&L

The foreign currency gains or losses on the hedging instrument are deterred in OCI, to the extent that
the hedge is effective, until the subsidiary is disposed of or liquidated, when they become part of the
gain or loss on disposal.

What has changed?

No major changes are introduced by PFRS 9. although entities should consider whether their net
investment hedges will be affected by the requirements to consider time value of money and the new
guidance on time value of options, forward points and currency basis.

What do PAS 39 and PFRS 9 have in common?

There are several major points that remained almost the same:

1. Optional
A hedge accounting is an option, not an obligation-both in line with PAS 39 and PFRS 9.
2. Terminology
Both standards use the same most important terms: hedged item, hedging Instrument, fair
value hedge, cash flow hedge, hedge effectiveness, etc.
3. Hedge documentation
Both PAS 39 and PFRS 9 require hedge documentation in order to qualify for a hedge
accounting.
4. Categories of hedges
Both PAS 39 and PFRS 9 arrange the hedge accounting for the same categories: fair value
hedge, cash flow hedge and net investment hedge. The mechanics of the hedge accounting
is basically the same.
5. Hedge Ineffectiveness
Both PAS 39 and PFRS 9 require accounting for any hedge ineffectiveness in profit or loss.
There is an exception related to hedge of equity investment designated at fair value through
other comprehensive income in line with PFRS 9: all hedge Ineffectiveness is recognized to
other comprehensive income.
6. No written options
Entities cannot use written options as a hedging instrument in line with both PAS 39 and
PFRS 9.

Differences in Hedge Accounting between PAS 39 and PFRS 9

The basics of hedge accounting have not changed. The major change lies in widening the range of
situations to which you can apply hedge accounting. In other words, under new PFRS 9 rules, you can
apply hedge accounting to more situations as before because the rules are more practical, principle
based and less strict.

The most important changes:

1. What can be used as a hedging Instrument

Under older rules in PAS 39, companies did not have much choices of hedging instruments.
Either they took some derivatives, or alternatively they could take also non-derivative financial
asset or liability in a hedge of a foreign currency risk. Not much.

PFRS 9 allows the use of broader range of hedging instruments, the use of any non- derivative
financial asset or liability measured at fair value through profit or loss.

2. What can be your hedged item

With regard to non-financial items PAS 39 allows hedging only a non-financial item in its entirety
and not just some risk component of it.

PFRS 9 allows hedging a risk component of a non-financial Item if that component Is separately
identifiable and measurable.

3. Testing hedge effectiveness

Testing the hedge effectiveness significantly simplified and came closer to the risk management
needs.

PFRS 9 enables an entity to use information produced internally for risk management purposes
and stopped forcing to perform complex analysis required only for accounting purposes.
PAS 39 requires testing hedge effectiveness both prospectively and retrospectively.

A hedge is highly effective only if the offset is in the range of 80-125 percent. It means that it a
company applies PAS 39. Its accountants must perform numerical test of effectiveness often
these tests were performed solely in order to meet PAS 39 and for no another reason.

PFRS 9 outlines more principle-based criteria with no specific numerical thresholds.

4. Rebalancing
Rebalancing a hedge means modifying the hedge by adjusting a hedge ration for risk
management purposes. It's usually performed when the quantities of a hedge instrument or a
hedged item change. In a similar situation, PAS 39 required terminating the current hedge
relationship and starting the new one, In practical terms, entities would have to start all over
again: prepare a hedge documentation, assess its effectiveness etc.

PFRS 9 makes it easier, because it allows certain changes to the hedge relationship without
necessity to terminate it and to start the new one.
5. Discontinuing hedge accounting
PAS 39 allowed companies to discontinue hedge accounting (except for other circumstances)
voluntarily, when the company wants to.

On the other hand, PFRS 9 does not allow terminating a hedge relationship voluntarily, so once
the entity decide to apply hedge accounting under PFRS 9. the entity cannot discontinue it
unless the risk management objective changed, the hedge expired or is no longer eligible.

6. Other differences
There are a number of other differences between hedge accounting under PAS 39 and PFRS 9.
Just to name a few of them:
 Possibility to apply hedge accounting to exposures that give rise to two risk positions
that are managed by separate derivatives over different periods - new In PFRS 9.
 Less profit or loss volatility when using options and/or forwards.
 Option to account for "own use" contracts to buy or sell a non-financial item at fair
value through profit or loss if it eliminates accounting mismatch-new In PFRS 9.
 More alternatives for hedges of credit risk using credit derivatives

Assessing Hedge Effectiveness under PFRS 9

In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness
criteria at the beginning of each hedged period:

 there is an economic relationship between the hedged item and the hedging
Instrument:
 the effect of credit risk does not dominate the value changes that result from that
economic relationship; and
 the hedge ratio of the hedging relationship is the same as that actually used In the
economic hedge, l.e., hedge ration is designated based on actual quantities of hedged
item and the hedging instrument.

Split Accounting in Assessing/Measuring Hedge Effectiveness

PPRS requires all derivatives to be valued at their fair values. Thus, both the time value element and the
intrinsic value element are valued at fair value. Accordingly, the need to determine the breakdown of the
total fair value occurs only if spilt accounting is used.

Intrinsic value may be viewed as being conceptually different from the time value, It theoretically can be
accounted for separately from the time value. Carving out the time value element and reporting its gain
or loss separately from the manner of reporting the Intrinsic value element's gain or low is referred to as
split accounting.

Intrinsic value is the Incremental premium paid (difference between the spot price and the exercise price
to be placed in this favorable position). The entire premium is called the time value (time value is
analogous to a prepaid insurance that could be amortized over the life of the option period).

PFRS9 permits (but does not require an entity to exclude all or part of a derivative's time value element
in assessing hedge effectiveness. Thus, spill accounting (accounting for the time value element in
separate manner from the intrinsic value element) is permitted.
For forward contracts purposes, time value element applies to premium and discounts on forward rotes.

If hedge effectiveness were assessed by excluding time value element, the presumed change in fair value
of the foreign currency commitment would be based on the change In the spot rate not the change in
the forward rate. Thus, one compares:

1. Only the foreign currency forward's Intrinsic value change (attributable to the change In the
spot rate) with,
2. The change in the foreign currency commitment's fair value using the change in the spot rate

IV. Basic Accounting issue Involving Hedging and Hedge Accounting

Hedging contrasts with hedge accounting, as follows:

 Hedging changes risks, whereas hedge accounting changes the accounting for gains and losses.
 Hedging and hedge accounting are both optional activities (even when a position is hedged, the
entity does not have to use hedge accounting to account for the transaction).
 Hedging is a business decision-hedge accounting is an accounting decision. Hedging accounting
is allowed only when hedging Instrument is a:
 derivative (other than a written option).
 written option when used to hedged a purchased option, or
 nonderivative financial asset or liability when used to hedged foreign currency risks.
 A hedging instrument might not be designated for only a portion of the time period over which
the instrument is outstanding.

Hedging, for accounting purposes, means designating a derivative financial instrument as an offset in net
profit or loss, in whole or in part, to the change in fair value or cash flows of a hedged Item.

A non-derivative financial instrument may also be a designated hedging instrument, but only with
respect to hedge foreign currency risks.

The designation must be in writing, up front (no retrospective designations), and be consistent with an
established risk management strategy. In essence, PFRS 9 hedge accounting is not mandatory. If an
enterprise does not want to use hedge accounting, it simply does not designate a hedging relationship.

The basic accounting issue for hedging is determining whether the gain or loss on the hedging
instrument can be reported in earnings in the same period in which the loss or gain on the hedged item
occurs. Two possibilities exist to achieve concurrent recognition:

1. Immediate recognition. Recognize both currently in earnings (in which case they most likely
would be netted against each other for display purposes instead of showing both the gain
and loss).
2. Delayed recognition. Defer recognition of both until they both can be recognized in earnings
later at the same time.

Hedge accounting recognizes symmetrically the offsetting effects on net profit or loss of changes in the
fair values of the hedging instrument and the related item being hedged.

PFRS 9 identifies three types of hedge:

1. Fair value hedge - this hedges against the risk of changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment (or portion of such asset, liability, or
firm commitment attributable to a particular risk. Such as the fair value of fixed rate debt will
change as a result of changes in interest rates.
2. Cash flow hedge - this hedges against the risk of changes in expected cash flows, it is a
hedge of the exposure to variability in cash flows that is attributable to a particular risk
associated with:
a. A recognized asset or liability such as future interest payments or variable- Interest debt
or
b. A highly probable forecasted transaction such as a forecasted sale or purchase that will
affect future reported profit or loss.
3. Hedge of a net investment in foreign operations.

Under the fair value hedge, it shall be accounted for as follows:

(a) the gain or loss from remeasuring the hedging instrument at fair value (for a derivative hedging
instrument) or the foreign currency component of its carrying amount measured in accordance with PAS
21 (for a non-derivative hedging instrument) shall be recognized in profit or loss; and

(b) the gain or loss on the hedged item attributable to the hedged risk shall adjust the carrying
amount of the hedged item and be recognized in profit or loss. This applies if the hedged item is
otherwise measured at cost. Recognized of the gain or loss attributable to the hedged risk in profit or
loss applied if the hedged item is an available-for-sale financial asset.

On the other hand, a cash flow hedge shall also be accounted for as follows:

(a) the portion of the gain or loss on the hedging instrument that is determined to be an

(b) effective hedge shall be recognized as other comprehensive income: and the ineffective portion
of the gain or loss on the hedging instrument shall be recognized in profit or loss.

Hedge of a net investment in a foreign operation, including a hedge of a monetary item that is accounted
for as part of the net investment, shall be accounted for similarly to cash flow hedges:

a. the portion of the gain or loss on the hedging Instrument that is determined to be an effective
hedge shall be recognized as other comprehensive income; and
b. the ineffective portion shall be recognized in profit or loss.

The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge is
reclassified to profit or loss on the disposal or partial disposal of the foreign operation.

Forward Contracts

A forward contract is an agreement between a buyer and a seller that requires the delivery of some
commodity at a specified future date at a price agreed to today (the exercise price). A typical example of
forward contracts is FOREIGN CURRENCY FORWARD CONTRACTS

A foreign currency forward contract is an agreement to buy or sell a foreign currency at:

1) a specified future date (usually within 12 months), and

2) a specified exchange rate. This rate is called the forward rate.

A the inception of the contract, the forward rate normally varies from the spot rate. The difference
between the two rates is referred to as a discount (premium) if the forward rate is less than (greater
than) the spot rate.

The use of forward contracts includes the following:

Hedge

a. Forward contracts used as a hedge of a foreign currency transaction. These include importing
and exporting transactions denominated in foreign currency. These hedges do not qualify for
hedge accounting under PAS No. 39 because the foreign exchange gains and losses are already
reported at market value on the balance sheet.
b. Forward contracts used as a hedge of an unrecognized firm commitment (This type of hedge
are now treated as a fair value hedges rather than cash flow hedges. However. PFRS 9 clarifies
that a hedge of the foreign currency risk of a firm commitment can be treated as either a cash
flow hedge or fair value hedge). Hedge accounting rules apply. Both the change in the value of
the hedge and the value of the hedged Item are reported in earnings (before the contract is
reported in the books).
c. Forward contract used as a hedge of a foreign-currency-denominated "forecasted" transaction
(a cash flow hedge). Initially foreign exchange gains and losses on the hedging Instrument are
recognized in equity, while no offsetting amount is reported on the hedged Item. Eventually, the
exchange gains and losses will be reported in earnings in the period the hedged items affect
earnings (le.. if the item hedged is a forecasted purchase of Inventory, the gains and losses on
the hedge can be reclassified into earnings when Inventory is sold, or when a forecasted
purchase of equipment, the gains and losses on the hedge will be reclassified into earnings as
the equipment is depreciated.)
d. Forward contracts as a hedge of a net investment in foreign operations.

Speculation. Forward contracts used to speculate changes in foreign currency. Forward rate should be
used because a firm speculating in foreign currency changes in exposed to the risk of movements in the
forward rate. Foreign exchange gains and losses are reported currently in the income statement.

The Notional Amount

In order to fully understand derivative, one must know the number of units (quantity) that is specified in
the derivative instrument. This is called the notional amount, and it determines the total peso value of a
derivative, traceable to movement or changes in the underlying. In other words, It is the total face
amount of the asset or liability that underlies the derivative contract. The notional amount of a
derivative is the number of currency units, number of shares, number of bushels of commodity, pounds,
or other units specified in the financial instrument. It may also refer to principal amount of debt.

The notional amount can be misleading because the value of a derivative is a function of changes in
prices or interest rates and is normally equal to just a small fraction of the notional amount of the
underlying asset.
For example, a forward contract has a notional amount of P25,000 (30,000 foreign currency units /120
foreign currency unit per peso) but has a fair value of PO on the day the forward agreement is signed, In
summary, notional amounts grossly overstate/understate both the fair value and the potential cash flows
of the derivatives.

Hedge Accounting Summary of Accounting for Foreign Exchange Gains and Effectiveness

Purpose of the Type of Hedge Hedge Accounting Accounting Accounting Result

Foreign Exchange Applies Treatment
Derivatives
To hedge a foreign “Undesignated No Recognize Concurrent
exchange Hedge" Hedge” Immediately in P recognition in P&L
receivable foreign & L (same
exchange payable treatment L.. for
foreign ex- change
gain or loss on
hedged Item)
To hedge a firm Fair value hedge Yes Recognize Concurrent
commitment Immediately in P recognition in P&L
& L (same
treatment L.. for
foreign ex- change
gain or loss on
hedged Item)
To hedge a Cash flow hedge Yes To the extent, the Concurrent
forecasted foreign hedge is effective, recognition in P &
transaction recognized as OCI recognized as Lon
a delayed OCI
The Ineffective basis.
portion of the
gain or loss will be
re- ported
immediately in P
&L
To hedge an Net Investment Yes Recognized in OCI. Concurrent
investment in a Hedge Remove recognition in P &
subsidiary recognition on a recognized as Lon
and recognize in a delayed OCI
delayed basis. P & basis.
L upon disposal of
the Investment.
To speculate Not applicable No Recognize Recognition in P&
immediately in L currently.
P & L.
OCI-Other Comprehensive Income.
Comparison: Fair Value Hedge versus Cash Flow Hedge

Fair Value Hedge Cash Flow Hedge

Hedging Instrument (Forward On balance sheet carried at FAIR On balance sheet carried at FAIR
Contract) VALUE VALUE
Gain or loss on HEDGING Recognized immediately in P&L To the extent, the hedge is
INSTRUMENT effective, recognized in OCI
The ineffective portion of the
gain or loss will be reported
immediately in P&L
Gain or loss on the HEDGED Recognized immediately in P&L Not applicable forecasted
ITEM due to hedged risk transactions are not recognized
Gain or loss in OCI section is No applicable If the item hedged is a
transferred to P & L forecasted purchase of
inventory, the gains and losses
on the hedge will be reclassified
into earnings when inventory is
sold, or when a forecasted
purchase of equipment, the
gains and losses on the hedge
will be reclassified into earnings
as the equipment is depreciated

Forward Contracts

Hedging an Exposed Liability - No Premium or Discount ("Undesignated Hedges" or Hedge does not
require Hedge Accounting)

Items 1 and 2 are based on the following information:

On October 17, 20x7, Shirley Ireneo Co. purchased from a Thailand firm an inventory costing 10,000
baht. Payment is due on January 15, 20x8. Also on October 17, Shirley Ireneo Co, entered into a foreign
exchange forward to buy 10,000 baht on January 15, 20x8.

10/17/x7 12/31/x7 1/15/x8

Spot rate (baht)………………………….. P1.30 P1.42 P1.40
Forward rate (baht)........................ 1.36 1.43 1.40

1. The December 31, 20x7 profit and loss statement, foreign exchange gain or loss due to hedged item
amounted to:

a. P 200 gain c. P1,200 gain

b. 1,000 loss d. 1,200 loss
Solution:
(d)

10/17/20x7: Spot rate………………………………………… 1.30

12/31/20x7: Spot rate………………………………………… 1.42
Forex loss per unit………………………………………………. P .12
Multiplied by: Number of foreign currencies………. 10,000
Foreign exchange loss due to hedged item…………. P 1,200 (d)

The forward rate is the rate quoted for the exchange of two currencies at a specified future date. It
differs from the spot rate because of the difference in interest rates in the international financial
markets.

A premium exists on an foreign exchange forward when a party buys or sells forward at more than the
spot rate. A discount exists on an foreign exchange forward when a party buys or sells forward at less
than the spot rate.

For recording purposes, premiums or discounts have no bearing at all meaning there is no need to set-up
such account. However, for option contracts wherein the writer assumes the responsibility of incurring a
potential loss, the writer charges a fee called a premium. Thus, the premium is the price paid to acquire
the option.

The forward rate generally differs from the spot rate, but as one moves closer to the expiration date (or
settlement date), the difference between the spot rate and the forward rate for the remaining period of
the contract becomes smaller and smaller so that at the expiration date, the forward rate will have
converged with the spot rate.

2. The December 31, 20x7 profit and loss statement, foreign exchange gain or loss due to hedging
instrument-forward contract:

a. P 200 gain c. P1,200 gain

b. 1,000 loss d. 1.200 loss
Solution:

(c)

10/17/20x7: Original forward rate (90 days)……………………… 1.30

12/31/20x7: Current (remaining) forward rate (15 days)…… 1.42
Current (remaining) forward rate (15 days)……………………….. P .12
Multiplied by: Number of foreign currencies…………………….. 10,000
Foreign exchange gain due to hedging instrument……………. P 1,200 (c)

To determine if a gain or loss occurred during any two dates, always view:

(1)The forward rate at the inception date as the buying rate (when buying forward), or the selling rate (if
selling forward), and
(2) all subsequent forward rates as the opposite rate. Because the forward rate at inception is fixed,
merely ask: "Did the opposite rate moves favorably or unfavorably?" An increase in the selling rate is
favorable, whereas an increase in the buying rate is unfavorable.

Hedging an Exposed Liability - With Premium Added ("Undesignated Hedges" or Hedge does not
require Hedge Accounting)

Items 3 through 6 are based on the following Information:

On October 17, 20x7, Aljon Lee, Inc. purchased from a Thailand firm an inventory costing 10,000 baht.
Payment is due on January 15, 20x8. Also on October 17, Aljon Lee, Inc. entered into a foreign exchange
forward to buy 10,000 baht on January 15, 20x8.

10/17/x7 12/31/x7 1/15/x8

Spot rate (baht)………………………….. P1.30 P1.42 P1.40
Forward rate (baht)........................ 1.36 1.43 1.40

3. What amount will Aljon Lee disclose as the fair value of the forward contract on December 31, 20x7?

a. P0 c. P13,600
b. 700 d. 14,300
Solution:

(b)

Fair Value of Forward Contract, net:

October 17. 20x7 (no initial fair value……………………….. P.0.
December 31, 20x7:
10/17/20x7: Original Forward Rate
(10,000 baht x P1.36)……………………………………. P13,600
12/31/20x7: Current (remaining) forward rate
(10,000 x P1.43)…………………………………………… 14,300
Forex gain on forward contract………………………………… 700*
Fair value of forward contract, net, 12/31/20x7
(a receivable)………………………………………………. P 700 (b)

"Net Position Accounting"

October 17, 20x7: No entry should be made to record the forward contract because, the forward has a
fair value of P0.

December 31, 20x7: (refer to No. 2 for computation of gain)

Forward Contract Foreign Currency Receivable 700
Gain on Foreign Currency Forward Contract 700

"Gross" or "Broad" Accounting

October 17, 20x7:

Forward Contract Foreign Currency Receivable from

Exchange Dealer (10,000 baht x P1.36 original forward rate)....... 13,600
Pesos Payable to Exchange Dealer…………….. 13,600

December 31, 20x7

Forward Contract Foreign Currency Receivable from
Exchange Dealer................................................................. 700
Gain on Foreign Currency Forward Contract……… 700

Still, the fair value of the forward contract amounted to P700

computed as follows:
Forward Contract-Baht (Foreign Currency) Receivable from
Exchange dealer, 12/31/20x7 (10,000 baht x P1,43 current
remaining forward rate)………………………………………….. P14,300
Pesos Payable to Exchange dealer (10,000 baht x P1.36
original forward rate)………………………………………………… 13,600
Net Position (a receivable)……………………………………………………. P 700

Note: In this case, the foreign currency forward contract is technically not accounted for as a fair value
hedge. Instead, it is accounted for as an exposed liability, with gains and losses on the derivative being
recognized immediately in income. However, because the foreign currency payable is remeasured using
the current exchange rate at December 31, 20x7, with the resulting loss being recognized in income
statement. the loss on the foreign currency payable and the gain on the derivative cancel out one
another, and the net effect is the derivative had been accounted for as a fair value hedge under PFRS 9

4. What amount will Aljon Lee's fair value of the forward contract on January 15, 20x82

a. P400 c. P13.600
b. 700 d. 14,300
Solution:

(a)

Fair value of forward contract, net, 12/31/20x7 (a receivable) -

refer to No.3………………………………………………………………… P 700
1/15/20x8 Loss on forward contract/hedging instruments
(P1.40-P1.43) x 10.000……………………………………….. . (300)
Fair value af forward contract, net, 1/15/20x6 (a receivable)………. P 400 (a)

Or, alternatively:
10/17/20x7 (date of hedging/inception of forward contract):
Current (original) Forward Rate (90 days forward rate) P 1.36
1/15/20x8 (date of settlement/expiration): Spot Rate…………. 1.40

Gain (net) on the entire forward contract…………………………….. P .04

x: Number of foreign currencies – baht……………………………….. 10,000
Fair value at forward contract, net, 1/15/20x6 (a receivable) P 400 (a)
5. What was the net impact on Aljon Lee, Inc.'s income in 20x8 as a result of P100 increase in net income
this hedge?

a. P-0- c. P100 increase in net income

b. P100 decrease in net income d. P200 increase in net income
Solution:

(b)

Hedged Item:
12/31/20x7: Spot rate.................................................... P 1.42
1/15/20x8: Spot rate………………………………………………….. 1.40
Forex loss per unit………………………………………………………. P .02

Multiplied by: Number of foreign currencies.................. 10,000

Foreign exchange gain due to purchase of inventory...... P 200
Hedging Instrument:
12/31/20x7: Current (remaining) forward rate (15 days) P 1.43
1/15/20x8: Spot rate……………………………………………………. 1.40

Forex loss per unit………………………………………………………. P .03

Multiplied by: Number of foreign currencies.................. 10,000
Foreign exchange loss due toward contract……………...... 300
Net Impact on net Income In 20x8 decrease (loss)……………… P(100)

In hedging, one creates a counterbalancing position to an exposure. It should be noted for this type of
hedge or forward contract instrument the test for "high effectiveness" is not applicable, since this type of
forward contract is considered as "undesignated hedges" or "hedge does not require hedge accounting"

Items 6 through 8 are based on the following information:

On September 1, 20x7, Ramus Company purchased machine parts from Jacky Chan Company for
6,000,000 Hong Kong dollars to be paid on January 1, 20x8. The exchange rate on September 1 is HK$7.7
P1. On the same date, Ramus enters into a forward contract and agrees to purchase HK$6,000,000 on
January 1. 20x8, at the rate of HK$7.7=P1. On December 31, 20x7 and on January 1, 20x8. the exchange
rate is HK$8.0=P1.

6. What is the fair value of the forward contract on December 31, 20x72

a. P 0 c. P750,000
b. 29,221 d. 779,221
Solution: (b)

Fair value of Forward Contract:

September 1, 20x7 (no initial fair value………………………….. P 0
December 31, 20x7:
9/1/20x7: current (Original) Forward Rate
(HK$6,000.000/HK$7.7)………………………………………….. P 779,221
12/31/20x7: Spot rate (HK$6,000,000/HK$8.0)…………………. 750,000
Forex loss on forward contract………………………………………….. 29,221
Fair value of Forward Contract, 12/31/20x7 (a Payable) P 29,221

*Under the forward contract, Ramus must pay P779.221 to purchase HK$6,000,000 on January 1, 20x8.
Equivalently, Ramus can make a settlement payment if the peso value of HK$6,000,000 on January 1,
20x8, is less than P779.221, and it can receive a payment If the value is more. In this case, the value is
P750,000 (HK$6,000,000/8.0), so Ramus must make a payment.

7. The nominal value of the forward contract on December 31, 20x72

a. P 0 c. P750,000
b. 29,221 d. 779,221
Solution:

(b) refer to No. 6 for computation.

8. What is the notional value of the HK$ forward contract?

a. P 0 c. P750,000
b. 29,221 d. 779,221
Solution:

(d) HK$6,000,000/HK$7.7P779.221. The notional amount is the total amount of the asset or liability that
underlies the derivative contract. The notional amount can be misleading because the value of a
derivative is a function of changes in prices or interest rates and is normally equal to just a small fraction
of the notional amount of the underlying asset.

A notional amount may be expressed in the number of currency units, shares, bushels pound or other
units specified in the financial instrument.

The P779,221 is the notional amount of the forward contract, but has a fair value of PD (refer to No. &
for computation) on the day the forward agreement is signed, e.g. September 1. 20x7. In summary, there
might be a possibility that notional amounts grossly overstate/ understate both the fair value and the
potential cash flows of the derivative.

9. Meisner Co. ordered parts costing 100,000 baht for a foreign supplier on May 12 when the spot rate
was P.24 per baht. A one-month forward contract was signed on that date to purchase 100,000 bahts at
a forward rate of P.25 per baht. On June 12, when the parts were received and payment was made, the
spot rate was P.28 per baht. At what amount should inventory be reported?

a. P 0 c. P24,200
b. P28,000 d. P25,000
Solution:

(b) (P.28. spot rate on the date of transaction x 100,000 bahts P28,000)
10. On January 15, a Philippine company purchases merchandise from a foreign supplier for FC (foreign
currencies) 1,000,000, when the spot rate is P0.15/FC. On the same date, it enters a forward contract for
delivery of FC 1,000,000 on March 15, at a rate/price of P0.148/FC. On March 15, when the spot and
forward rate for March P.156/FC, the company buys the forward contract and pays for the merchandise.
The merchandise has not yet been sold at March 15. What amount, in pesos, does the company pay for
the merchandise? At what amount, in pesos, does the merchandise appear on the company's March 15
balance sheet?

Amount paid Merchandise Amount paid Merchandise

balance balance
a. P148,000 P148,000 c. P156,000 P150,000
b. P148,000 P150,000 d. P150,000 P156,000
Solution:

(b) Armount pald is the forward rate/price; PO.148 x 1,000,000 10 P148,000 Merchandise is reported at
the spot rate of the date of purchase: PO.15 x 1,000,000=P150,000.

11. Use the following information on the Philippine peso value of the FC (foreign currency)

Forward rate for March 20,

Spot rate 20x4 delivery
November 30, 20x3 P1.50 P1.49
December 31, 20x3 1.53 1.51
March 20, 20x4 1.55 1.55

On November 30, 20x3, a Philippine company, with a December 31 year- end, enters a forward purchase
contract for FC (foreign currencies) 100,000 to be delivered on March 20, 20x4. The forward contract
does not qualify as a hedge. The company closes the contract at its expiration date. Which statement is
true?

α. No gain or loss is reported until the forward is closed on March 20.

b. A gain of P2,000 is reported in 20x4.
c. A gain of P4,000 is reported in 20x4.
d. A gain of P6,000 is reported in 20x4.
Solution:

(c) The change in value of the forward is reported in income as the forward rate changes. For 20x4, the
gain is (P1.55-P1.51) x FC 100,000 P4,000. The statement "forward contract does not qualify as a hedge"
means it is not a hedge accounting", therefore, any gain or loss on hedging instrument will be presented
in the Income statement (statement of comprehensive income).

12. On December 1, 20x7, Joseph Company, a Philippine Company, entered into a three-month forward
contract to purchase 1,000,000 foreign currencies on March 1, 20x8. The following peso per peso
exchange rates applies:

Forward rate for

Spot rate (March 1, 20x8)
December 1, 20x7 P0.044 P0.042
December 31, 20x7 P0.040 P0.037
March 1, 20x8 P0.038 N/A

Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at an annual
interest rate of 12 percent (1 percent per month) is .9803. Which of the following is included in Joseph's
December 31, 20x7 balance sheet for the forward contract?

α. An asset in the amount of P1,960.60.

b. An asset in the amount of P3,921.20.
c. As a liability in the amount of P6,862.10.
d. As a liability in the amount of P4,901.50.
Solution:

(d) (P0.042-P0.037 P.005 exchange loss x 1,000,000 foreign currencies P5,000 x.9803 P4901.5
loss/liability) rate. (Note: the gross or broad accounting method is used)

13. Taste Bits Inc. purchased chocolates from Thailand for 200,000 bahts on December 1, 20x7. Payment
is due on January 30, 20x8. On December 1, 20x7, the company also entered into a 60-day forward
contract to purchase 200,000 bahts. The forward contract is not designated as a hedge. The rates were
as follows:

Spot rate Forward rate

December 1, 20x7 P0.89 P0.90 (60 days)
December 31, 20x7 P0.91 P0.93 (30 days)
January 30, 20x8 P0.92

The entries on December 31, 20x7, include a:

a. Credit to Foreign Currency Payable to Exchange Broker, P4,000.

b. Debit to Foreign Currency Receivable from Exchange
c. Broker, P6,000. Debit to Foreign Currency Receivable from Exchange Broker,
d. P186,000. Debit to Foreign Currency Transaction Gain, P4,000.
Solution:

(b) (P.90, the 60 days original forward rate less P.93, the 12/31/x8 remaining forward (Note: the gross or
broad accounting method is used)

14. Using the same information in No. 13, the entries on January 30, 20x8,

α. Debit to Pesos Payable to Exchange Broker, P180,000.

b. Credit to Cash, P184,000.
c. Credit to Premium on Forward Contract, P4,000.
d. Credit to Foreign Currency Receivable from Exchange Broker. P180,000.
Solution:

(a) (P.90, the 60 days original forward rate times 200,000 bahts.)

15. Using the same information in No. 13, the entries on January 30, 20x8, include α:

a. Credit to Foreign Currency Units (Bahts), P184,000.

b. Credit to Cash, P180,000.
c. Debit to Foreign Currency Transaction Loss, P4,000.
d. Debit to Pesos Payable to Exchange Broker, P184,000.
Solution:

(b) refer to No. 6. It should be noted that the forward contract agreement is for the buyer to pay the
original forward rate.)

16. Using the same information in No. 13, the entries on January 30, 20x8, include α:

a. Debit to Pesos Payable to Exchange Broker, P184,000.

b. Credit to Foreign Currency Transaction Gain, P4,000.
c. Credit to Foreign Currency Receivable from Exchange Broker, P180,000.
d. Debit to Foreign Currency Units (Bahts), P184,000.
Solution:

(d) (P.92, the spot rate on the date of receipt of the foreign currency, which is also the date of expiration
of the forward contract.)

With Present Value: Hedging an Exposed Liability

Items 17 through 22 are based on the following information:

Stark, Inc. placed an order for inventory costing 500,000 foreign currency (FC) with a foreign vendor on
April 15 when the spot rate was I FC P0,683. Stark received the goods on May 1 when the spot rate was 1
FC =P0.687. Also on May 1, Stark entered into a 90-day forward contract to purchase 500,000 FC at a
forward rate of 1 FC P0.693. Payment was made to the foreign vendor on August 1 when the spot rate
was 1 FC = P0.696. Stark has a June 30 year-end in that date, the spot rate was 1 FC-P0.691, and the
forward rate on the contract was 1 FC P0.695. Changes in the current value of the forward contract are
measured as the present value of the changes in the forward rates over time. The relevant discount rate
is 6%.

17. The foreign exchange gain or loss on hedging instrument (forward contract) on June 30 amounted to:

a. P2,000 c. P995
b. 1,000 d. Zero
Solution:

(c)

5/1: Original forward rate (90 days) P .693

6/30: Current (remaining forward rate (30 days) .695

Forex gain per unit P . 002

Multiplied by: Number of foreign currencies 500,000

Foreign exchange gain due to hedging Instrument P 1,000

Less: Discount-P1,000 x 6% x 30/360 days 5

PV of foreign exchange gain due to hedging instrument..... P 995 (c)

18. The nominal value of the forward contract on June 30 amounted to:

a. P2,000 c. P995
b. 1,000 d. Zero
Solution:

(b) refer to No. 16 computation.

19. The fair value of the forward contract on June 30 amounted to:

a. P2,000 c. P995
b. 1,000 d. Zero
Solution:

(c) The fair value of the forward contract is the present value of the nominal value of P1,000 which is
P995 (refer to No. 17 computation)

20. The net income effect on June 30 amounted to:

a. P2,000 c. P1,005
b. 1,000 d. P 995
Solution:

(c)

Foreign exchange loss due to Hedged item:

5/1: Spot rate…………………………………………………………………………. P .687
6/30: Spot rate……………………………………………………………………….. .691

Forex loss per foreign currency………………………………………………. P .04

Multiplied by Number of foreign currencies…………………………… 500,000
Foreign exchange loss due to hedged item…………………………….. P2,000
PV of foreign exchange gain due to hedging Instrument
(forward contract-refer to No. 17)………………………….. 995
Net Income effect decrease………………………………………………………………. P1,005 (c)

21. The foreign exchange gain due to hedging instrument (forward contract) on August 1 amounted to:

a. P2,500 c. P1,500
b. 2,000 d. 505
Solution:

(d)

Foreign exchange loss due to Hedged item:

(5/1: Original forward rate (90days)…………………………………………….. P .693
8/1: Spot role……………………………………………………………………………….. .696

Forex gain per currency………………………………………………………………… P .003

Multiplied by Number of foreign currencies…………………………………. 500,000
Total Foreign Exchange gain due to hedging Instrument
(forward contract)……………………………………………… P1,500
Less: 6/30 cut-off PV of foreign exchange gain due to hedging
Instrument (forward contract- refer to No. 17)…………………………………. 995
August 1 - Foreign exchange gain due to hedging
Instrument (forward contract)……………………………………………… P 505

22. Belsen purchased inventory on December 1, 20x8. Payment of 200.000 foreign currencies was to be
made in sixty days. Also on December 1. Belsen signed a contract to purchase 200,000 foreign currencies
in sixty days. The spot rate was P1 = 2.80 FC and the 60-day forward rate was P1 = 2.60 FC. On December
31, the spot rate was P1 = 2.90 FC and the 30-day forward rate was P1 = 2.62 FC. Assume an annual
interest rate of 12% and a fair value hedge. The present value for one month at 12% is.9901.

In the journal entry to record the establishment of a forward exchange contract, at what amount should
the Forward Contract account be recorded on December 1?

a. P71,428.57
b. P76,923.08
c. P5,549.51
d. P0, since there is no cost, there is no value for the contract at this date.
Solution:

(d) There is no fair value of contract on the date of hedging or forward contract.

Hedging an Exposed Asset-"Undesignated Hedges" or Hedge does not require Hedge Accounting

Items 23 through 25 are based on the following information:

On April 4, 20x7. Conrado Uberita Beauty Products delivered to a Pakistan firm inventory it sold for
100,000 rupees. Payment is due to be received on August 2. 20x7. The company's fiscal year ends June
30. Also on April 4, Conrado Uberita Beauty Products entered into a foreign exchange forward to sell
100,000 rupees on August 2. 20x7.

4/4/x7 6/30/x7 8/2/x7

Spot rate (rupee)…………………. P.80 P.84 P.82
Forward rate (rupee)…………… .77 .83 .82

23. What was the net impact on Conrado Uberita's income in 20x7 as a result of this hedge?

a. P-0- c. P2.000 decrease

b. P2.000 increase d. P3,000 increase
Solution:

(c)

Hedged Item:
4/04/20x7: Spot rate P .80
6/30/20x7: Spot rate. .84

Forex gain per unit P .04

Multiplied by: Number of foreign currencies 100,000
Foreign exchange gain due to sales of inventory 4,000
Hedging Instrument:
4/04/20x7: Original forward rate (120 days) P .77
6/30/20x7: Current (remaining) forward rate (33 days) .83

Forex loss per unit P .06

Multiplied by: Number of foreign currencies. 100,000
Foreign exchange loss due to forward contract 6,000
Net Impact on net income in 20x7 - decrease (loss) P (2,000)

24. The fair value of the forward contract on June 30, 20x72

a. P0 c. P 6,000
b. P4,000 d. P83,000
Solution:

(c)

Fair Value of Forward Contract:

April 4, 20x7 (no initial fair value). P 0
June 30, 20x7:
4/4/20x7: (Current (Original) Forward Rate
(100,000 rupees) x P.77).. P77,000
6/30/20x7: Spot rate (100,000 rupees x P.83) 83,000
Forex loss on forward contract 6,000
Fair value of forward contract 6/30/2017 (a payable) P 6,000

*Incidentally, the entry to recognize the foreign exchange gain on hedging instrument and also to reflect
the fair value of the forward contract should be:

"Net Position" Accounting

April 4, 20x7: No entry should be made to record the forward contract because, the forward has a fair
value of P0

June 30, 20x7

Loss on Foreign Currency Forward Contract 6,000
Forward contract Foreign Currency Payables 6,000

" Gross" or "Broad" Accounting

April 4, 20x7
Pesos Receivable from exchange dealer
(100,000 rupees x P.77) 77,000
Forward contract Foreign Currency Payables 77,000

June 30, 20x7

Loss on Foreign Currency Forward Contract 6,000
Forward contract Foreign Currency Payables 6,000
Still, the fair value of the forward contract amounted to P6,000 computed as follows:

Forward Contract Foreign Currency Payable P83,000

Pesos Receivable from Exchange Dealer 77,000

Net Position (a payable)* P 6,000

25. The fair value of the forward contract on August 2, 2017?

a. P1,000 c. P82,000
b. P5,000 d. P83,000
Solution:

(b)

Fair value of forward contract. 6/30/20x7 (a payable) - refer to No. 24. P6,000
Loss of forward contract/hedging instruments (P.82-P.83) x 100.000 (1,000)
Fair value of forward contract, net, 8/2/20x7 (a payable) P5,000

26. On June 1. CamCo received a contract to sell inventory for 500,000 yens. The sale would take place in
90 days. CamCo immediately signed a 90- day forward contract to sell the yen as soon as they are
received. The spot rate on June I was P1 = 240 yens and the 90-day forward rate was P1 = 234 yens. At
what amount would CamCo record the Forward Contract on June 1?

α. P0 c. P2,110
b. P2,083 d. P2,532
Solution:

(a) there is no fair value of contract on the date of hedging or forward contract

27. MNC Corp. (a Philippine-based company) sold parts to a foreign customer on December 1, 20x7, with
payment of 10 million foreign currencies to be received on March 31, 20x8. The following exchange rates
apply:

Spot rate Forward rate (for 3/31/20x8)

December 1, 20x7 P.0035 P.0034 (4 months)
December 31, 20x7 .0033 .0032 (3 months)
March 31, 20x8 .0038 N/A

MNC's incremental borrowing rate is 12 percent. The present value factor for three months at an annual
rate of interest of 12 percent (1 percent per month) is 0.9706.

Assuming that MNC entered into no forward contract, how much foreign exchange gain or loss should it
report on its 20x7 income statement with regard to this transaction?

a. P5.000 gain c. P2.000 loss

b. P3.000 gain d. P1,000 loss
Solution:

(c) No forward contract, therefore, only the sale transaction: (P.0035-P.0033 P.0002 loss x. 10 million
foreign currencies = P2.000 loss.)

28. Using the same information in No. 25 and assuming that MNC entered into a forward contract to sell
10 million foreign currencies on December 1. 20x7, as a fair value hedge of a foreign currency receivable,
what is the net impact on its net income in 20x7 resulting from a fluctuation in the value of the foreign
currencies?

a. No impact on net income. c. P2,000 decrease in net Income.

b. P58.80 decrease in net income d. P1,941.20 increase in net income.
Solution:

(b)

Sale Transaction/Hedge Itern- refer to No. 27 above P2.000.00 loss

Hedging Instrument/Forward Contract
(P.0034-P.0032 gain x 10 million foreign currencies P2.000 gain x 9706) 1,941,20 gain
Net decrease in net income P58,80 loss

29. On July 1, 20x7, Cahoon Company sold some limited edition art prints to Sitake Company for
¥47,850,000 to be paid on September 30 of that year. The current exchange rate on July 1, 20x7, was
¥110=P1, so the total payment at the current exchange rate would be equal to P435,000. Cahoon
entered into a forward contract with a large bank to guarantee the number of pesos to be received.
According to the terms of the contract, if ¥47,850,000 is worth less than P435.000, the bank will pay
canoon the difference in cash. Likewise, if ¥47,850,000 is worth more than P435,000, Canoon must pay
the bank the difference in cash. Assuming the exchange rate on September 30 is ¥105=P1, what amount
will Cahoon pay to or receive from, the bank (rounded to the nearest peso)?

a. P18,913 payment с. 220.714 payment

b. 18.913 receipt d. 20.714 receipt
Solution:

(c)

Fair value of forward contract

July 1, 20x7 (no initial fair value P0
September 30, 20x7:
7/1/20x7: Current (Original) Forward Rate. P435,000
9/30/20x7: Spot rate (¥47,850,000/105 yens) 455,714
Forex loss on forward contract 20,714*
Fair value of forward contract, 12/31/20x7 (a payable) P20,714 (c)

"Incidentally, the entry to recognize the foreign exchange gain an hedging instrument and also to reflect
the fair value of the forward contract should be:
"Net Position Accounting"

July 1, 20x7: No entry should be made to record the forward contract because, the forward has a fair
value of P0.

September 30, 20x7;

Loss an Foreign Currency Forward Contract 20,714
Forward Contract Foreign Currency Payable 20,714

Forward Contract Foreign Currency Payable 20,714

Cash 20,714

Under the forward contract, Cahoon must receive P435,000 to sell ¥47,850,000 on July 1, 20x7.
equivalently. Cahoon can make a settlement collection in pesos if peso value of ¥47,850,000 on
September 30, 20x7, is less than P435,000, and it can receive a payment if the value is more. In this case,
the value is P455,714 (¥47,850,000/105), so Cahoon must make a payment.

30. On November 1, 20x7, Cahoon Company sold some limited edition of prints to Sitake Company for
¥47,850.000 to be paid on January 1.2018. The current exchange rate on November 1, 20x7, was ¥110-
P1, so the total payment at the current exchange rate would be equal to P435,000. Cahoon entered into
a forward contract with a large bank to guarantee the number of pesos to be received. According to the
terms of the contract, if ¥47,850,000 is worth less than P435,000, the bank will pay Cahoon the
difference in cash, Likewise, if ¥47,850,000 is worth more than P435.000. Cahoon must pay the bank the
difference in cash. Assuming the exchange rate on December 31, 20x7 is ¥115-P1, what amount will
Cahoon disclose as the fair value of the forward contract on December 31, 20x7 (answers rounded to the
nearest peso)?

a. P0 c. P 20,714
b. 18,913 d. 416,087
Solution:

(b)

Fair value of forward contract

November 1, 20x7 P0
December 31, 20x7:
11/1/20x7: Current (Original) Forward Rate P435,000
12/31/20x7: Spot rate (¥47,850,000/115 yens) 416,087
Forex loss on forward contract 18,913*
Fair value of forward contract, 12/31/20x7 18,913(b)

Hedging an Unrecognized Foreign Currency Firm Purchase Commitment-Hedge Accounting Applies

Items 31 through 40 are based on the following information:

On October 2. 20x7. Asser Tamayo, inc. ordered a custom-built passenger van from a Japanese firm. The
purchase order is noncancelable. The purchase price is 1,000,000 yens with delivery and payment to be
on March 31, 20x8. On October 2. 20x7, Asser Tamayo, Inc. entered into a forward contract to buy
1,000,000 yens on March 31, 20x8 for P.57. On March 31, 20x8, the custom-built passenger van was
delivered.

12/31/7 10/2/x7 3/31/x8

Spot rate (rupee)…………………. P.50 P.56 P.57
Forward rate (rupee)…………… .53 .58 .57

Accounted for as Fair Value Hedge

31. The December 31, 20x7 profit and loss statement, net foreign exchange gain or loss (forward contract
and commitment):

a. P10,000 net gain c. P10,000 net gain

b. 10,000 net loss d. Not applicable since hedge accounting does
not apply
Solution:

(c) fair value hedge

Hedged Item/Commitment:
10/02/20x7: Original forward rate (180 days) P .53
12/31/20x7: Current (remaining) forward rate (90 days) .58

Forex gain per unit P . 05

Multiplied by: Number of foreign currencies 1,000,000
Foreign exchange gain due to sales of inventory
P50,000

Hedging Instrument:
10/02/20x7: Original forward rate (180 days) P .53
12/31/20x7: Current (remaining) forward rate (90 days) .58

Forex loss per unit P . 05

Multiplied by: Number of foreign currencies. 1,000,000
Foreign exchange gain due to forward contract P50,000
Net gain (loss) P 0

The forward rate generally differs from the spot rate, but as one moves closer to the expiration date (or
settlement date), the difference between the spot rate and the forward rate for the remaining period of
the contract becomes smaller and smaller so that at the expiration date, the forward rate will have
converged with the spot rate.

Protecting against an adverse change in the exchange rate between the order date (commitment date)
and the transaction date is hedging a firm foreign-currency- denominated commitment.
32. The Firm Commitment account balance as shown in the December 31. 20x7 balance sheet amounted
to:

a. P50,000 asset c. P50,000 liability

b. 60,000 liability d. None, since it is a fair value hedge
Solution:

(c)-fair value hedge

The entry to record the foreign exchange loss due to hedged item/commitment on December 31, 20x7
would be:

Foreign Exchange Loss-Firm Commitment 50,000

Foreign Currency Exchange Firm Commitment (a liability) 50,000

The Firm Commitment account is a temporary account for an unrecognized firm commitment firm
commitment. If it has a debit balance, it is shown in the the asset section of the balance sheet; when it
has a credit balance, as it is in this problem, It is shown in the liability section.

33. What is the fair value of the forward contract on December 31, 20x7?

a. P50,000 receivable c. P60,000 receivable

b. 50,000 payable d. 60,000 payable
Solution:

(a)

Fair Value of Forward Contract: P 0

October 2. 20x7: (no Initial fair value)
December 31, 20x7
10/2/20x7: Original Forward Rate (180 days) P .53
12/31/20x7: Current remaining forward rate (90 days) .58
Forex gain per unit .01
x: No. of yens. 1,000,000
Forex gain on forward contract. 50,000
Fair value of forward contract, 12/31/2017 (a receivable) P50,000 (a)

34. What is the fair value of the forward contract on March 31.20x8?

a. P50,000 receivable c. P40,000 receivable

b. 50,000 payable d. 40,000 payable
Solution:

(c)

Fair value of forward contract, 12/31/20x7 (a receivable) P50,000

3/31/20x8 Loss forward contract/hedging instrument (P.58-P.57) x 1,000,000 10,000
Fair value of forward contract, net, 3/31/20x8 (a receivable) P40,000
35. The Firm Commitment account balance on March 31, 20x8 amounted to:

a. P10,000 asset c. P40,000 asset

b. 50,000 liability d. 40,000 liability
Solution:

(d) fair value hedge

December 31, 20x7 balance of Foreign Currency Exchange

Firm Commitment Account (a liablilty) P50,000
March 31, 20x8: Foreign Currency Exchange
Firm Commitment Account (a receivable)
12/31/20x7: Current (remaining) forward rate(180 days) P .58
3/31/20x8: Spot rate* .57
Forex gain per foreign currency unit .01
x: Number of foreign currencies 1,000,000
Foreign exchange gain due to hedged item/commitment 10,000
Balance of Firm Commitment, March 31, 20x8 (a net liability account) P40,000

*if the date of transaction and date of settlement of forward contract falls on the some date, obviously
the spot rate and the current (remaining) forward rate should also be the same.

36. The value of the equipment on March 31. 20x8 amounted to:

a. P500,000 c. P560,000
b. 530,000 d. 570,000
Solution:

(b)

PFRS 9 states that "When an entity enters into a firm commitment to acquire an asset or assume a
liability that is hedged in a fair value hedge, the initial carrying amount of the asset or liability that
results from the entity meeting the firm commitment is adjusted to include the cumulative change in the
fair value of the firm commitment attributable to the hedged risk that was recognized in the balance
sheet."

Incidentally the entries to record on:

The date of transaction (date of purchase and delivery of equipment) would be:

Equipment (spot rate, 3/31/x8, P.57 x 1.000.000) 570,000

Cash or Investment in Foreign Currency 570,000

To remove the carrying amount of the firm commitment from the balance sheet and adjust the initial
carrying amount of the equipment that results from the firm commitment.

Foreign Currency Exchange Firm Commitment 40,000

Equipment 40,000

Or, alternatively:
Equipment 530,000
Foreign Current Exchange Firm Commitment (net liability) 40,000
Cash or Investment in t in Foreign Currency 570,000

Note that the Foreign Currency Exchange Firm Commitment account of P40,000 a liability) is effectively
transferred to asset acquired. The value of the equipment should be the original forward rate on the
October 2, 201x (date of hedging). P.53 (P.53 x1,000,000 P530,000).

In summary, the result of these accounting entries is as follows:

Equipment 530,000
Cash or Investment in Foreign Currency 530,000

which is somewhat reassuring given the starting presumption, le. that Asser Tamayo, Inc. had effectively
fixed the purchase price of its equipment at P530,000.

Accounted for as Cash Flow Hedge.

37. The December 31, 20x7 profit and loss statement, foreign exchange gain or loss on hedged
item/commitment amounted to:

a. P50,000 loss c. P60,000 loss

b. 50,000 gain d. Not applicable, since it is a cash flow hedge
Solution:

(d) cash flow hedge

38. The December 31. 20x7 foreign exchange gain or loss on the hedging instrument (forward contract)
amounted to:

α. F50,000 gain, other comprehensive income. c. P60,000 lass, other comprehensive income
b. P50,000 gain, current earnings d. P60,000 gain, current earnings
Solution:

(a) cash flow hedge

10/02/20x7: Original forward rate (180 days) P 53

12/31/20х7: Current (remaining) forward rate (90 days) .58
Forex gain per unit. P .05
Multiplied by: Number of foreign currencies 1,000,000
Foreign exchange gain due to forward contract. P 50,000

39. The Firm Commitment account balance amounted on March 31, 20x8 amounted to:

a) a. P10,000 asset b) b. 50.000 liability

c) c. P40,000 liability d) d. None, since it is a cash flow hedge

SOLUTIONS: (d)cash flow hedge

40. The value of the equipment on March 31, 20x8 assuming that Asser Tamayo, Inc. has elected to and
adjust the cost of non-financial items acquired:

a) a. P500.000 b. P530,000
b) c.P560.000 d. P570.000

SOLUTIONS: (b)

Incidentally the entries to record on:

The date of transaction (date of purchase and delivery of equipment) would be:
Equipment (spot rate. 3/31/x8. P.57 x 1,000,000) ………………. 570,000
Cash or investment in Foreign Currency………………… ………………………. 570,000
To remove the gain recognized in other comprehensive income and the initial carrying amount of the
equipment that results from the hedged transaction by this amount.
Other Comprehensive income-gain. ………………………………………40.000
Equipment …………………………………………………………………………………………40,000
10/02/20x7: Original Forward rate
(6 months) ………………………………………………………. P .53
3/31/20x8 Spot rate …………………………………………………… .57
Forex gain per foreign currency…………………………………… P .40
x: No. of yens……………………………………………………………… 1000,000
OCI-gain ……………………………………………………………………... P40.000
*If the date of transaction and date of settlement of forward contract falls on the tame date, obviously
the spot rate and the current (remaining) forward rate should also be the same.

Or, alternatively

Equipment…………………………………………………………………………… 530,000
Other Comprehensive income-gain ……………………………………… 40,000
Cost or Investment in Foreign Currency …………………………………………. 570.000

Note that the Other Comprehensive Income account of 140.000 is effectively transferred to asset
acquired. The value of the equipment should be the original forward rate on the October 2. 20x7 (date of
hedging). P.53 (P.53 1.000.000-530.000.

In summary, the result of these accounting entries is as follows:

Equipment ………………………………………………….... 530,000

Cash or investment in Foreign Currency ……………………………...530.000
Which reflects the starting presumption, I.e. that Asser Tamayo, Inc. had effectively fixed the purchase
price of Its machine at 530,000. However, the route to get to this position may also seem slightly
convoluted.

Items 41-and 42 are based on the following information:

On October 1, 20x7. JMI Company ordered some equipment from a supplier for 200.000 baht. Delivery
and payment is to occur on November 30, 2017. The spot rates on October I and November 30 are P1.50
and F1.30.

41. if the company does not hedge the commitment, at what amount is the equipment recorded on the
books on November 30, 20x7?

a) P300.000 b. 260:000
c) P200.000 d. 0

SOLUTIONS:

41. (b) fair value hedge- P1.30 spot rate (on delivery date /transaction date) x 200.000 baht=P260.000

42. If the company acquires on October 1, 20x7 a forward contract to hedge any unfavorable changes in
for value of the equipment, at what amount is the equipment recorded on the books on November
30.20x77 The October 1. 20x7 forward rate for November 30 settlement is P1.35.

a) a. P300.000 b) b. P260
c) c. P 260 d) d. P 200.000

SOLUTIONS: (c)

Fair Value hedge

Incidentally the entries to record on:
The date of transaction (date of purchase and delivery of equipment would be Equipment) would be:
Equipment (spot rate, 11/30/x7, P 1.30 x 20,000) …………. 260,000
Cash or investment in Foreign Currency 260,000 ………………………………………260,000

To remove the carrying amount of the firm commitment from the balance sheet on adjust the initial
carrying amount of the equipment that results from the firm commitment

Foreign Currency Exchange

Firm commitment…………………………………………………………… 10,000

Equipment………………………………………………………………………..………… 10.000
"The foreign currency exchange gain due to
hedged item/commitment was computed as follows:
10/01/2x17: Current forward rate P 1.35
11/30/2017, Spot rate 1.30
Forex gain per foreign currency P .05
x Number of foreign currencies 200,000
Foreign exchange gain due to
hedged item/commitment…………………………. P10,000

If the date of transaction and date of settlement of forward contract false on t same date, obviously the
spot rattle and the current remaining forward rate shot also be the same.

Or, Alternatively:

Equipment………………………………………………………………......... 270.000
Foreign Current Exchange Firm Commitment(asset) ……………………… 10,000
Cash or investment in foreign currency………………………………………….260,000

Note that the Foreign Currency Exchange Firm Commitment account of 10.000(asset) is effectively
transferred to asset acquired. The value of the equipment should be the original forward rate on the
October, 20x7 (date of hedging). P1.35 (P1.35x 200,000 =P270.000)

In summary, the result of these accounting entries is as follows:

Equipment …………………………………………………………….270,000
Cash or investment in Foreign Currency……………………………………... 270.000

It should be noted that JMI Company had effectively fixed the purchase price of is equipment at
P270.000.

Items 43 through 50 are based on the following Information:

Precious Enterprises sells apples to food processors in the Far East Asia. On July 31. it enters into an
agreement (commitment to sell apples to a foreign company for 50,000,000 FC (foreign currencies). The
apples will be delivered October 15 with payment due on November 15. The spot and November 15
forward exchange rates on July 31 are 1 FC= P.0085 and 1 FC P.0092. respectively. Washington prepares
quarterly financial statements with a December 31year end. The relevant exchange rates and forward
contract fair values are as follows:

Nov, 15
Date Spot Rate Forward rate forward Contract Fair Value
Sept. 30 P.0084 P.0090 P 10,000
Oct. 15 P.0088 P.0087 P 25,000
Nov. 15 P. 0086 P.0076 P 30,000
43. What is the value recognized in the financial accounting records on July 31 for the forward contract?

a. P460.000 b. P430,000
c. P 30.000 d. P

SOLUTIONS: (d)-Forward contracts always have a value of PO at the date they are established

44. What is the value of the forward contract of September 30?

a. P10,000 b. P15000
c. P25,000 d. P30,000

SOLUTIONS: (a) 10.000

45. What is the gain or loss on the forward contract at September 30?

a. P10,000 b. P15000
c. P25.000 d. P30.000

SOLUTIONS: (a) (10,000-Po)

46. What is the net gain or loss on the income statement at September 30?

a. P O b.P5.000
c. P10.000 d 30.000

SOLUTIONS: (a)The forward contract gain or loss is offset by the loss or gain on the sales commitment

47. What is the value of the forward contract at October 15?

a.P10,000
b. P15,000
c. P25,000

d. P30,000

SOLUTIONS: (c) P25,000

48. What is the gain or loss on the forward contract at October 15?
a. P10,000
b. P15,000
c. P25.000
d. P30,000

SOLUTIONS: (b) (P25.000-10.000)

49. What is the net gain or loss on the income statement at October 157 P 0 b. P5.000 C. P15,000 d.
P25,000

SOLUTONS: (a)-The forward contract Gain or loss is offset by the loss or gain on the sales commitment

50. What is the net gain or loss on the income statement at October 15%

α. P 25,000
b. P440.000
c. P460,000
d. P465,000

SOLUTIONS: (d) (150,000,000x.0088) +(150,000,000 (P.0092-0087)-P465,000)

With Present Value: Hedging a Firm Purchase Commitment

Items 51 through 57 are based on the following information: On January 1, 20x7, San Jose, Inc. enters
into an agreement to purchase 1,000 watches for 5,000 foreign currencies (FC) per watch, to be
delivered on March 31, 20x7. The contract meets the requirement of a firm commitment. The resulting
payable is expected to be settled on April 30, 20x7. On February 1, 20x7 (fiscal year ends February 28),
San Jose, Inc. decides to hedge the foreign currency exposure enters into a forward contract to exchange
peso for FC 5,000,000 on April 30, 20x7 (at a forward rate of FC 1.429: P1). The forward contract is
designated as a hedge of the firm commitment to purchase the watches on March 31, 20x7 and to settle
the balance owing on April 30, 20x7, Effectiveness will be assessed based on the forward rate. The
relevant discount rate is 6%

The following table summarizes the key data:

Spot rate Forward rate of contract expiring 4/30/20x7

Date FC per Peso FC per Peso
1/1/20x7 1.450 1.429
2/1/20x7 1.400 1.429
2/28/20x7 1,400 1,415
3/31/20x7 1.410 1,400
4/30/20x7 1.360 1,360
51. What was the net impact on San Jose Inc.'s February 28, 20x7 income statement as a result of this
fair value hedge?

a.137,660 increase
b. 134.149 decrease

c. 134.273 decrease
d. P-O-

SOLUTIONS: (d)

Hedged item/Commitment:
2/1/20x7: Original forward rate:
FC 5.000.000/1.429 ……………………………………………………. P 3,498,950
2/28/20x7: Current (remaining) forward rate:
FC 5,000,000/1.429……………………………………………………. 3,533,569
Forex loss on hedged item…………………………………………………. P 34,619
Less discount-
P 34,619 % x 60 days (March and April/360 days 344
PV of foreign exchange loss due to hedged item…………………. P 34,273
Hedging Instrument:
2/1/20x7: Original forward rate:
FC 5,000,000/1.429 ……………………………………………………P 3,498,950
2/28/20x7: Current (remaining) forward rate:
FC 5,000,000/1.415 …………………………………………………. 3,533,569
Less: Discount- P 34,619
34,619 x 6% 134.619 x 6% x 60 days (March and April)/360 days 334
PV foreign exchange gain due to hedging Instrument P 34,273
Net impact on net income on February 28, 20x7 ……………………………… P-0-
3.533.569 P3461 P342/2
Or. alternatively the computation of present value may also be presented as:
Foreign exchange lost ……………………………………………………………………………………….P 34,619
Divided by: 100% (6%/12x 2 months equivalent to 60 days) ……………………………… 1.01
PV of foreign exchange loss due to hedging Item P 34.276*
* discrepancy of P3 due to rounding off.

52. What is the fair value of the firm commitment account on February 28. 20x7?

a. 134,619 liability
b. 134.273 liability
c. P34.273 losses
d. P37.860 asset

SOLUTIONS: (b)

The entry to record the foreign exchange loss due to hedged item/commitment (refer to No. 51) on
February 28, 20x7 would be:
Foreign Exchange Loss-firm Commitment……………………………………34,273
Foreign Currency Exchange Firm
Commitment (a lability) …………………………………………………..….... 34,273

53. What was the net impact on San Jose Inc.'s March 31, 20x7 income statement as a result of this for
value hedge?

a. –O-
b. P34,273 increase
c. P37,844 increase
d. P72.117 decrease

SOLUTIONS: (a)

Hedged item/Commitment:
2/1/2017 Original forward rate:
FC 5,000,000/1.429 ………………………………………………P 3,498,950
3/31/2017 Current forward rate":
FC 5.000.000/1400 ……………………………………………… 3,571,429
Foreign Exchange Loss due to Hedged item…………………… P 72,479
Less: Discount-
P72,479 x 4% x 30 days (month of April/360 days 362
PV of foreign exchange loss due to hedged item ………… P 72,117
Less: PV of foreign exchange loss due to hedging item
on 2/28/20x7 (No. 52) ………………………………………. 34,273
PV of foreign exchange loss due to hedged item.
3/31/20x7 …………………………………………………………. P 37,844
Hedging instrument:

2/1/20x7: Original forward rate:

FC 5.000.000/1.429 ……………………………………………….P 3.498,950
3/31/2017: Current forward rate:
FC 5.000.000/1,400 ………………………………………………...3,571,429
Foreign Exchange Gain Hedged item. P 72,479
Less: Discount-
P72,479x6%x30days (month of April/360 days………. 369
PV of foreign exchange gain due to hedged item ………... P 37,844
Less: PV of foreign exchange gain due to hedging item
on 2/28/2017 (No. 52). PV …………………………………… 34,273
PV of foreign exchange gain due to hedged instrument … P 37,844
3/31/20x7
Net Impact on net Income on March 31, 20x7 ………………………… P -0-
 It should be noted mat the date of transaction (March 31, 20x7) does not fall within the same date
of settlement of the forward contract (Apr 30, 20x7), therefore the spot rate and forward should not
be the same, thus, such situation requires the use of me current forward rate to determine the gain
or lost hedged item/commitment

54. What is the fair value of the forward contract on March 31, 20x7?

a. P34619
b. P37.844
c. 137.860
d. P72.117

SOLUTIONS: (d) - the PV (For Value) of forward contact on March 31, 20x7 is P72,117 (refer to No. 53 for
computation).

55. What is the value of Inventory on March 31, 20x7 56. What is the carrying amount of accounts
payable on April 30, 20x7?

A. P 3676,471
b. 3,571,429
c. P3.546.099
d. P3.473,982

SOLUTIONS: (d)

refer to Nos. 36 and 42 above for further discussion regarding the disposition of the firm commitment
account.

3/31/20x7: Spot rate: FC 5,000,000/1:410………………………………………… P3,546,099

Less. for value of firm commitment (credit balance-
refer to No. 53 for computation) ……………………………………………………… 72,117
Value of inventory, 3/31/20x7…………………………………………………………… 3,473,982

56. What is the carrying amount of accounts payable on April 30, 20x7?

a. P3.676.471
b. P3.571.429
C. P3.546.099
d. P3.473,982
SOLUTIONS: (a)

3/31/20x7 Spot rate: FC 5,000,000/1410 P3,546,099

4/30/2017 Spot rate: FC 5,000,000/1.360 P3,576.471
Loss on retranslation of accounts payable P 130.372

57. What is the fair value of the forward contract on March 31, 20x7?

a. P177,521
b. P130,372
c. F72.117
d. F34.273
SOLUTIONS: (

(a)

2/1/2017 Original forward rate: FC 5.000.000/1.429……………………………………………… P 3.498.950

4/30/2017 Spot rate: FC 5.000.000/1.360 ……………………………………………………………… 3,676,471
PV (Fair value of forward contract, 4/30/2008 177.521

58. A Philippine company issues a purchase order for merchandise to a foreign supplier. The agreed
upon total price is FC (foreign currencies) 1,200,000 and the current spot rate is PI/FC. Suppose the
company enters a forward contract when the purchase order is issued, at a rate of P0.95/FC, for deliver
when the merchandise is received, if the spot rate rises to F1.05 when the merchandise is received and
paid for, at what value will the merchandise be reported on the company's books?

a. 1,020,000
b. 1,140,000
c. P1.200.000
d. P1,260.000

SOLUTIONS: (b)

P1,05 x FC 1,200,000 =……………………………………………………………………. P1.260.000

(P1.05-P.95) FC 1,200,000=……………………………………………………………… 120.000

P1,140,000

Hedging an Unrecognized Foreign Currency Firm Sales Commitment - Hedge Accounting Applies (Fair
Value Hedge)

Items 59 through 63 are based on the following information:

On October 12, 20x7, Mark, Inc. obtained a Noncancelabl3e sales order from a Thailand firm for a
custom-made statue of her beloved Gina. The contract price was 100,000 baht. On October 12, 20x7
Mark entered into a foreign exchange forward to sell 100,000 baht in 100 days at the forward rate of
P3.15. The statue wat delivered on December 11, 20x7 and collection on January 20, 2008.

10/12/x7 12/11/x7 12/31/x7 1/20/x8

Spot rate (baht) P3.20 P3.00 P3.009 P2.98
Forward rate (baht) 3.15 P2.98 3.08 2.97

59. What was the net impact on Mark, Inc.'s December 11, 20x7 income as a result of this fair value
hedge?
a. -0-

b. 17,000 decrease

C.P17.000 increase

d. P20.000 decrease

SOLUTIONS: (a)

refer to No. 53 for further discussion regarding the date of transaction and date of settlement of
forward contract do not toll within the same date.

hedged item/Commitment:
10/12/20x7: Original forward rate (100 days) ……………………………… P 3.15
12/11/2017: Current (remaining forward rale 170 days ……………… 2.98
Forex loss per unit ………………………………………………………………………… P .17
Multiplied by: Number of foreign currencies ………………………………… 100,000
Foreign exchange loss due to hedged item.
/ commitment ……………………………………………………………………. P17,000
Hedging Instrument:
10/12/20x7: Original forward rate (100 days) ………………………………… P. 315
12/11/20x7: current (remaining) forward rate
(70 days) ……………………………………………………. ……………………… 2.98
Forex gain per unit…………………………………………………………………………. .17
Multiplied by: Number of foreign currencies …………………………………. 100,000
Foreign exchange Gain due to forward contract …………………………… P 17,000
Net impact on income on December 11,20x7………………………………………... P -0-

60. What are the reportable sales in the income statement in 20x7 assuming that the firm commitment
account be closed to sales account?

a.P300,000

b. P308.000
c. P309,000
d. P317,000

SOLUTIONS: (a)

fair value hedge (refer to Nos, 36 and 42 for further discussion of firm commitment)
Sales value at spot rate on the date of delivery (transaction date)
December 11. 20x7: 13.00 x 100,000 baht ……………………………………………………………. P 300,000
Adjustment for the foreign currency exchange firm commitment
-credit balance refer to No. 59):
Foreign exchange loss-firm commitment………………………… 17,000
Foreign Currency Exchange Firm
Commitment …………………………………………………………………. 17,000 17,000
Reportable sales in the 2017 Income statement …………………………………… P317,000

61. On December 31, 20x7, the foreign exchange Gain or loss on the accounts receivable (AR) and firm
commitment (FC) amounted to:

AR FC AR FC
a. P9.000 loss –O- c. P 9.000 gain P9,000 gain
b P9,000 gain -O- D. P -0- P9.000 loss
SOLUTIONS: (b)

On Accounts Receivable:
12/31/20x7: Spot rate ………………………………………………………………. P 3.09
12/11/20x7: Spot rate ……………………………………………………………… 3.00
Forex gain per unit......................................................................... P .09
Multiplied by: Number of foreign currencies……………………………100,000
Foreign exchange Gain on the accounts receivable………………… P P9000
On Firm Commitment: The account was already closed since the sales transaction already
consummated.

62. On December 31, 20x7, the foreign exchange Gain or loss on the hedging instrument (forward
contract) amounted to:

a. P7,000 gain
b. P7.000 loss
C. P 9.000 gain
d. P11,000 loss

SOLUTIONS: (a)

10/12/2017: Original forward rate (100 days) …………………………………………P3.15

12/31/2017: Current remaining) forward rale (20 days) ………………………… 3. 08
Forex gain per unit ………………………………………………………………………………… P .07
Multiplied by: Number of foreign currencies ……………………………………… 100,000
Foreign exchange gain due to hedging instrument…………………………………P 7,000

63. What was the net impact on January 31, 20x8 income as a result of this for value hedge?

a. –O-
B. P2.000 net gain
c. 1.000 net gain
D. 1.000 net loss
SOLUTIONS(d)

Hedging Instrument: Current (remaining) forward rate

(20 days) ………………………………………………………………………. P 3. 08
1/20/2018: Spot Rate …………………………………………………………… 2.97
Forex gain per unit ……………………………………………………………… P .11
Multiplied by: Number of foreign currencies…………………… 100.000
Foreign exchange Gain due hedging Instrument……………...... P 11,000
On Accounts Receivable:
12/31/2017: Spot rate……………………………………………………. P 3.09
1/20/2018: Spot rate……………………………………………………. 2.97
Forex loss per unit………………………………………………………… .12
Multiplied Number of foreign currencies……………………... 100,000
Foreign exchange loss on the accounts receivable 12,000
Net foreign exchange loss ……………………………………………… P(1,000)

64. On March 1, 20x7. West fields Corp. received on order for parts from a foreign customer at a price of
500.000 foreign currencies with a delivery date of April 30, 20x7, On March 1, when the peso-foreign
currency spot rate is PO.115. West fields Corp, entered into a two-month forward contract to sell
500.000 foreign currencies at a forward rate of P0.12 per foreign currency It designates the forward
contract as a fair value hedge of the firm commitment to receive foreign currencies, and the fair value of
the firm commitment is measured by referring to changes in the peso forward rate. West fields delivers
the parts and receives payment on April 30, 20x7. when the foreign currency rate is PO.118. On March
31, 20x7, the foreign currency spot rate is PO.123, and the forward contract has a fair value of P1,250.
What is the net impact on West fields net income for the quarter ended March 31, 20x7, as a result of
the forward contract hedge of a firm commitment?

a.-0-
b. P1,250 increase in net income
c. P1,500 decrease in net income
d. P1,500 increase in net income

SOLUTIONS: (a)

Gain on forward contract/hedging instrument:

3/1/2017: Fair value of forward contract …………………… P 0
3/31/2017: For value of forward contract ……………………1,250 P 1,250
Loss on firm commitment/hedged Items:
3/1/20x7: Fair value of forward contract ………………………… P 0
3/31/2017: Fair value of forward contract …………………… 1,250 P 1,250
Net Impact on March 31, 20x7 quarter ended………………………………………………. P-0-
-

65. Using the same information in No. 64, what is the net impact on West fields net income for the
quarter ended June 30. 20x7, as a result of the forward contract hedge of a firm commitment?
a.-0-
b. P59.000 increase in net income
C. P60.000 increase in net income
d. P61,500 increase in net income

SOLUTIONS: (c)

refer to Nos. 36 and 42 above for further discussion regarding the disposition of the

firm commitment account

Sales (spot rate on date of transaction, P.118 x 500.000) ……………………………………………..P 59,000

Adjustment-firm commitment account:
2/1/2017: Original forward rate :……………………………………….. P .120
4/30/207, Spot rate…………………………………………………………… .118
Forex loss per foreign currency……………………………………… .002
X: Number of foreign currencies……………………………………… 500,000
Foreign exchange lost due to
hedged item/commitment/ to a liability…………………………………. 1,000
Adjusted sales ………………………………………………………………………………. P 60,000
Gain on forward contact/hedging instrument
3/31/20x7: fair value of forward contract …………………………………………. P 1,250
4/30/20x7: Overall gain due to hedging instrument
(refer to above computation) …………………………………………………. 1,000 250
Loss on firm commitment/hedged item:
2/31/20x7: Fair value of forward contract …………………………………………. P 1250
4/30/20x7: Overall loss due to hedged them/ commitment
(refer to above computation) ……………………………………………………… 1,000 250
Net impact on June 30, 20x7 quarter ended- increase…………………………………. P 60,000

66. Using the same information in No. 64, what is the net increase or decrease in cash flow from having
entered into this forward contract hedge?

a. -0-
b. P1,000 increase in cash flow
c. P1.500 decrease in cash flow
d. P2.500 increase in cash flow

SOLUTIONS: (b)

Cash inflow with forward contract [500.000 Pesos x P.12) ……………………………………. P60,000
Cash Inflow without forward contract (500.000 Pesos x P.118) ……………………………… 59,000
Net increase in cash flow from forward contract……………………………………………………..P 1,000
Hedging a Forecasted Transaction-Hedge Accounting Applies

Items 67 through 69 are based on the following Information:

On December 1, 20x7, a Philippine firm, Cris Espenilla, Inc. estimates that at least 5,000 units of
inventory will be purchased from a company in Taiwan during January of 20x8 for 500.000 Nt dollars. The
transaction is probable, and it is to be denominated in Nt dollar. Sales of the inventory are expected to
occur in the months following the purchase.

The company enter into a forward contact to purchase 500.000 Nt dollar January 31.20x8 for P 1.01.

Spot rates and forward raters at the January 31,20x8 settlement were as follow (pesos per Nt dollar):

Forward Rate for

Spot Rate 1/31/x8
December 1,20x7……………………... P1.03 P 1.01
December 31,20x7…………………… 1.00 .99
January 31,20x8 …………………………. .98

67. The December 31, 20x7, foreign exchange loss on hedging instrument (forward contract) amounted
to:

a. P30.000, other comprehensive income

b. P30.000, current earnings
c.P10,000, current earnings
d. P10,000 other comprehensive income

SOLUTIONS: (d)

12/01/2017: original forward rate (2 months) ………………………………………………P 1.01

12/31/20x: Current (remaining) forward rate (1 month) ……………………………… .99
Forex loss per unit………………………………………………………………………………………. P .02
Multiplied by: Number of foreign currencies ……………………………………………… 500,000
Foreign exchange loss other comprehensive income…………………………………… P 10,000

68. On January 31, 20x8, foreign exchange Gain or loss on hedging Instrument (forward contract)
amounted to:

a. P15.000 debit, other comprehensive income

b. P10.000 debit, other comprehensive income

c. F 5.000 debit. other comprehensive income

d. 15.000 credit, current earnings

SOLUTIONS:

(a)
January 1, 20x7 beginning balance of foreign exchange loss-
Other comprehensive income (No.56) …………………………………………………………………. P 10,000
Settlement date of a forward contract:
12/31/20x7: Current (remaining) forward rate 1 month …………………………… P .99
1/31/20x8: spot rate ………………………………………………………………………………… .98
Forex loss per unit………………………………………………………………………………………………. P .01
Multiplied by: Number of foreign currencies………………………………………………………. 500,000
Foreign exchange loss other comprehensive income-………………………………………. 5,000
January 31,20x8 balance -other comprehensive Income
Loss (debit balance) …………………………………………………………………………………………… P 15,000

69. Suppose that in February, the inventory sold for P600,000, what would be the gross profit assuming
any adjustments (if any) regarding exchange differential will be thru Cost of Goods Sold Account:

a. P110.000
b. P105,000
C. P95,000
d. P90.000

SOLUTIONS:

(c)
Sales ……………………………………………………………………………………………………..P 600,000
Less: Cost of goods sold:
Cost of goods sold of spot rate on transaction date …… P 490,00
Add: OCI-debit balance (No. 68) ……........…………………………… 15,000 505,000
Gross profit ………………………………………………………………………………………. P 95.000

It a hedge of a forecast transaction subsequently results in the recognition of a non- financial asset or a
non-financial lability, then a choice of accounting policies is available. In these circumstances, an entity
should either:

 reclassify the associated gains and losses that were recognized in other comprehensive income
to profit or loss in the same period (s) during which the asset acquired or liability assumed
affects profit or loss, e.g. in the periods that depreciation expense or cost of sales is recognized.
however.It is expected that all or a portion of a loss recognized in other comprehensive Income
will not be recovered in one or more future periods, the amount that Is not expected to be
recovered should be reclassified from equity to profit or loss. Essentially the is the same as for
hedges of financial Items;
 or remove the associated gains and losses that were recognized in other comprehensive income
and include them in the initial cost or other carrying amount of the asset or liability as a "basis
adjustment.

With Present Value: Hedging a Forecasted/Anticipated Sales

Items 70 through 73 are based on the following information:

San Antonio, Inc. and its subsidiary DJ Company both uses the peso as their functional currency. San
Antonio wants to limit the effect of currency fluctuation in its group accounts in the next quarter, by
hedging forecasted foreign currency (FC) denominated sales by DJ Company. San Antonio expects DJ
Company to sell FC 13.500,000 of goods on June 30. 20x7 (fiscal year ends March 31). Therefor on
January 1, 20x7, it enters into a six-month forward contract sell FC 13,500,000 and receive P96,429 30.
20x7 (at a forward rate of 1 FC: P140), Since San Antonio and DJ company both have the same functional
currency, San Antonio is permitted to hedge the subsidiary's exposure. The relevant discount rate is 6%

The following table summarizes the key date:

Spot rate Forward Rate for

Date At indicated date 6/30/20x7
1/1/20x7 P1: FC 135 P1: FC 140
3/31/20x7 P1: FC 140 P1: FC 142
6/30/20x7 P1: FC 144 P1: FC 144

70. What was the net impact on San Antonio, Inc.'s March 31, 2017 income as a result of the cash flow
hedge?

a. –O-
b. P1,339 loss
c. 1.339 gain
d. P1359 gain

SOLUTIONS: (a)

gain or loss from hedging instrument should be recognized in other comprehensive Income.
1/01/20x7: Original forward rate: FC 13,500,000/140 ……………………………………… P 96,429
3/31/20x7: Current (remaining forward rate: FC 13,500,000/142 …………………… 95,070
Forex gain on hedging instrument equity ……………………………………………………………… P 1,359
Less: Discount-P1,359 x 6% x 3/12 (April to June) …………………………………………………… 20
PV of foreign exchange gain due to hedging Instrument-OCI ………………………………….P 1,339
Or, alternatively the computation of present value may also be presented as:
foreign exchange gain-OCI …………………………………………………………………………………. P 1.359
Divided by: [100% 16%/12 x 3 months remaining] ……………………………………………… 1.015
PV of foreign exchange gain due to hedging instrument…………………………………………. P 1,339

71. What is the fair value of the forward contract on March 31 20x7?

a. P 1339
b. P1,359
c. P3518
d. P3.571

SOLUTIONS: (a)

Fair Value of Forward Contract:

January 1, 20 March 31, 20x7 …………………………………………………… P0
March 31, 20x7(refer to No. 70 computation) …………………………… 1,339
PV of Forward Contract, 3/31/20x7 ……………………………………………………… P 1,339

72. What is the foreign exchange gain or loss due to hedging instrument on June 30, 20x7?

a. P1,340, current earnings

b. P 1340, OCI

c.P2.679, current earnings

d. P2,679, OCI

SOLUTIONS: (b)

1/1/20x7: Original forward rate: FC 13.500.000/140 ……………………………………… P 96,429

6/30/2017: Spot role: FC 13.500, 000/144 ……………………………………………………… 93,750
Total foreign exchange Gain due to hedging instrument……………………………………. P 2,679
Less: PV of foreign exchange gain due to hedging Instrument
on 3/31/2017-No. 70 ………………………………………………………………………………. P 1,339
Foreign exchange Gain due to hedging Instrument. 4/30/20x7 ………………………… P 1,340

73. What is the reportable sales amount on June 30, 20x7 assuming that any exchange differential will be
thru the Sales account.

a. P96.750
b. P96429
C. P95.070
d. P93.750
SOLUTIONS:(b)

Sales valued at spot rate on June 30, 20x7: 13.500.000/144……………………………… P 93,750

Add: Closing of foreign exchange gain due to ………………………………………………… 2,679
hedging instrument-OCI (No. 72).
Reportable sales amount on June 30, 20x7…………………………………………………………. P 96,429

Items 74 to 78 are based on the following information on the Philippine value of the FC (foreign
currency):

Spot rate Forward rate for April 30, 20x7

October 30, 20x6 P 1.45 P 1.50
December 31, 20x6 1.48 1.52
Apr 30. 20x7 1.46 1.46

On October 30, 20x6 o company enters a forward contract to sell FC 100.000 on April 30, 20x7. The
company's accounting year ends December 31.

74. The forward contract hedges an outstanding FC 100.000 account receivable due on April 30. What is
the net effect on income in 20x6 and 20x7?

20x6 20x7 20x6 20x7

a. gain P1,000 P4,000 gain c. P3,000 gain P6,000 gain
b. gain 1,000 gain P4,000 gain d. P2,000 loss P6,000 gain

SOLUTIONS: (d)

Exposed asset
20x6: Gain on receivable (P 1.48 – P 1.45) x FC 100,000=………………………………… 3000
Loss on forward (P1.52 – P 1.50) x FC 100,000=…………………………………… 2000
Net gain ……………………………………………………………………………………………… P 1,000
20x7: Loss on receivable, (1.48-P 1.46) x FC 100.000 =……………………………….… P 2,000
Gain on forward (P1.52- P1. 46) x FC 100,000=…………………………………… P 2,000
Net gain………………………………………………………………………………………………………… P4,000

75. The forward contact hedges sales order (a commitment) for FC 100.000 received October 30. The
sale was made and the FC, 100.000 collected April 30 20x7 Sales revenue recorded on Apr 30 is:

a. P142,000
b. 144,000
c. P 146,000
d. 150,000
SOLUTIONS: (d)
firm Commitment

(FC100,000x1.46) + (P 1.50-P1.46) x F 1000,000= p150,000 (I.e. the original forward on the care of
hedging as long as the date of transaction and settlement falls on some dole (e. Apr 30 20x7 (if the spot
rate and me forward rate have the same is an indicator mot the transaction and settlement dote falls on
the same date, therefore the original forward rare is the value of the sales)

76.The forward contact hedger a sales order (a comment) for FC 100,000 received October 30 the sale
was made and the FC 100.000 collected an April 30 20x7. The net effect on 20x6 income is:

a. no effect
b. P2,000 loss
c. P3,00 gain
d. 1000 gain

SOLUTIONS: (a) firm Commitment

the gain of the tom commitment and loss on the forward contract are (P1.52-P150) x FC 100.000 =2,000,
and they offset for a zero effect on 20x6 Income because the transaction and settlement date falls on the
same date.

77. The forward contact hedger a forecasted sale for FC (100.000 expected) the end of April 20x7. The
net effect on 20x7.The net effect on 20x6 income is:

a. no effect
b. P2000 loss
c. 3000 gain
d. 1000 gain

SOLUTIONS: (a)Forecasted Transaction.

The lost on the forward contract is reported in other comprehensive income.

78. The forward contract hedge forecasted sale for FC (foreign currencies

T00,000, expected at the end of April 20x7. The sale takes place on April 30

20x7, FC 100,000 is collected and the forward contract is closed. Which

statement is true, concerning the sale on April 30, 20x7?

a. The P4,000 total loss on the forward contract is reclassified from other

comprehensive income to reduce sales revenue.

b. The P4,000 total gain on the forward contract is reclassified from other

comprehensive income to increase sales revenue.

c. The 20x7, P6.000 gain on the forward contract is recognized as a hedging

gain on the 20x7 income statement.

d. The 20x6, P2,000 loss on the forward contract is recognized as a hedging

loss on the 20x6 income statement.

Solution:

78. (b) -Forecasted Transaction

The total gain on the forward contract is (P.50 - P1.46) x FC 100.000 = P4,000.- Changes

in the value of the forward are reported in other comprehensive income until the hedged

forecasted transaction is reported in income. In this case, sales revenue, reported in

20x7, is adjusted upward by the P4,000 gain.

Items 79 through 82 are based on the following information:

Forward rate for

Spot rate 1-/31 delivery

May 1 P1.50 P1.51

August 30 1.51 1.53

October 31 1.54 1.54

December 31 1.55 n/a

A Philippine company anticipates that it will sell merchandise for FC (foreign Currencies)

1,000,000 at the end of August, and receive payment for it at the end of October. On

May 1, it enters a forward contract to sell FC 1,000,000 on October 31. The forward contract

qualities as a cash flow hedge. The company actually, sells the merchandise on August 30, and

receives payment of FC1,000,000 actually sells and close the forward contract on October 31.

The company has a December 31 year-end.

79. Sales revenue is reported on the company's income statement in the amount of?
a. P1,540,000 C. P1,510,000

b. P1,530,000 d. P1,490,000

solution:

79. (d) – Changes in the value of the forward contract remain in other comprehensive

income until the date of sale, when they are reclassified as an adjustment to sales

revenue.(P1.53- P1.51) x 1,000,000 = P20,000 loss in OCI is reclassified as a reduction in

sales revenue of P1.51 x 1,000,O00= Pl,510,000. Net sales revenue is P1,490,000.

Journal entries related to questions 20 - 21:

August 30

Other comprehensive income …………………………………………………………….. 20,000

Investment in forward contract …………………………………………………………. 20,000

Accounts receivable ……………………………………………………………………………. 1,510,000

Other comprehensive income …………………………………………………………….. 20,000

Sales revenue ……………………………………………………………………………………… 1,490,000

October 31

Accounts receivable …………………………………………………………………………….. 30,000

Exchange gain ……………………………………………………………………………………… 30,000

Exchange loss……………………………………………………………………………………….. 10,000

Investment in forward contract ……………………………………………………………. 10,000

Foreign Currency ........................................................................................ 1,540,000

Accounts receivable …………………………………………………………………………….. 1,540,000

Cash ……………………………………………………………………………………………………… 1,510,000

Investment in forward contract ……………………………………………………………. 30,000

Foreign Currency... ………………………………………………………………………………… 1,540,000

80. What is the net exchange gain/loss for the year?

a. PO c. P30.000 net loss

b. P20,000 net gain d. P10,000 net loss

Use the following additional information to answer questions 81-82 A Philippine company
anticipates that it will purchase merchandise for FC (Foreign Currencies) 1,000,000 at the end of August,
and pay for the merchandise at the end of October. On May 1, if enters a forward contract to buy FC
1,000,000 on October 31. The forward contact qualities as a cash flow hedge. The company actually
purchases the merchandise on August 30, and closes the forward contract and pays the supplier

FC L,000,000 on October 31. The company has a December 31 year-end.

Solution:

80. (b) - Exchange gains and losses are reported on the receivable and the forward

Contract for August 30 through October 31, the net gain of P20,000 computed as follows:

(P1.54 - P1.51) x l,000,000 = P30,000 gain on receivable

(P1.54 - P1.53) x 1,000,000 = P10,000 loss on the forward contract

81. On August 30, the Company records the merchandise at what amount?

a. P1,490,000 c. P1,530,000

b. P1,510,000 d. P1,540,000

solution:

81. (b) - Forecasted Transaction

Changes in the value of the forward Contract remain in other comprehensive income

until the merchandise is sold, Therefore the merchandise Is recorded at the spot rate at

the date of purchase, P1.51 x 1,000,000= P1,510,000.

Journal entries related to questions 79 - 80:

August 3

Investment in forward ………………………………………………… 20,000

Other comprehensive income ……………………………………….. 20,000

Inventory …………………………………………………………………. 1,510,000

Other Comprehensive income ……………………………… 1.510,000

82. As of August 30, the effect of the above events on other comprehensive income is:

a. P0 c. P30.000 net loss

b. P20,000 net gain d. P10,000 net loss

solution:

82. (b) - Forecasted Transaction, Refer to No. 79 for journal entry to record the OCI.

The value of the forward contract increases by (Pl.53 - Pi.51) x 1,000,000 = P20,000

during the period May 1- August 30. This gain is reported in oci until the merchandise is

sold.

83. A Philippine company invests in a forward sale contract for l,000,000 FC (Foreign currencies)

at PO.85/FC, for delivery in 60 days. The spot rate at the time the contract is initiated

is PO.83/FC. At the end of the accounting year, the forward contract is still outstanding.

The year-end spot rate is PO.80. The year-end forward rate to delivery at the contract date

is P0.81. How is the forward contract reported on the Philippine company's year-end

balance sheet?

a. P30,000 assets c. P40.000 asset

b. P30,000 liability d. P40,000 liability

solution:

83. (c) - Forecasted Transaction

(PO.85 - PO.81| x 1,000.000 = P40,000. A forward sale at PO.85 is an asset when

the current sale price is PO.81, the remaining forward rate on the balance sheet date.

84. Use the following information on the Philippine peso value of the FC (foreign currency):
Forward rate for March 20

spot rate 20x4 delivery

November 30, 20x3 1.50 1.49

December 31,20x3 1.53 1.51

March 20, 20x4 1.55 1.55

On November 30, 20x3, a Philippine company, with a December 31 year- end, enters a forward

purchase contract for FC (foreign currencies) 100.000 to be delivered on March 20, 20x4. The

contract hedges a forecasted purchase of equipment. The forward is closed and the equipment

purchased on March 20. The company follows PFRS and reports gain and losses on hedges of

nonfinancial forecasted transactions on basis adjustments. Assuming no residual value, total

depreciation expense over the life of the equipment is

a. P149,000 c. P151,000

b. P150,000 d. P155,000

solution:

84. (a) - The equipment is recorded at the spot rate of Pl.55 x FC100,000 = P155,000, adjusted

for the P6,000 [= P1.55 - P1.49) x FCl00,000] OCI-gain on the forward contract, therefore.

the value of the equipment will be the original forward rate on the date of forecast, i.e.

November 30, 20x3. which is P1.49.

With Present Value: Hedging an Available-for-Sale-Equity Investments /FVTOCI

Items 85 through 88 are based on the following information:

Jennifer Company acquires 100,000 shares of New York Jewelers for FC 1.00 per share on January l, 20x7,
and classifies the investment as an available-for-sale financial asset /EVTOCI. New York Jewelers is listed
on the New York Stock Exchange only and all transactions in the company are denominated in the
foreign currency unit. The functional currency of Jennifer Company is the peso. Jennifer Company
decides to hedge the risk of currency fluctuations available-for-sale assets /FVTOCI over the next six
months and enters into a forward contract to sell FC 100,000 on June 30, 20x7, at an exchange rate of FC

62 per peso (Pl.613: FC 1). The relevant discount rate is 6%.

The following table summarizes the key data:

date sharing price (FC) spot rate FC per peso Forward Rate of contract

expiring ó/30/20x7 (FC per peso)

1/1/20x7 1.00 .60 .62

3/31/20x7 1.50 .65 .66

6/30/20x7 2.00 .70 .70

85. What is the gain or loss on available -for-sale security /FVTOCl on March 3l; 20x1?

a. P76,923 gain c. P64,102 loss

b. P64,102 gain d. P3,193 gain

solution:

85. (b)

Net gain or loss on available-for-sale security:

From Investment:

Gain as a result of changes in equity price - Equity:

(FC 100,000 x FC 1.50) - (EC 100,000 x P1.00]] =

FC 50,000 gain /.65 …………………………….. P76,923

Loss as a result of changes in foreign exchange rates -Earing’s:

[(FC 100,000 / 0.65) - (FC 100,000 / 0.60)]1.

measured at spot rates ……………………….. ( 12.821)

Net gain ………………………………………………………………………………………………….. P64,102 (b)

86. What is the net foreign exchange gain or loss on foreign currency on March 31,20x7?

a. P64,102 gain c. P9,628 gain

b. P12,821 loss d. P3,193 gain

solution:

86.(d)

Net foreign exchange gain or loss, March 31, 20x7:

Loss (in Investment) as a result of changes in foreign exchange rates:

[(FC 100,000 / 0.65) - (FC 100,000 / 0.60)].

measured at spot rates ……………………………………… P(12,821)

Hedging Instrument / Forward Contract:

1/1/20x7: Original Forward Rate:

FC 100,000 / 0.62 ……………………………………… P161,290

3/31/20x7: Current Remaining Forward Rate:

FC100,000 / 0.66 ………………………………….. 151,515

Gain on hedging instrument ……………………………………………………… P9,775

Less: DiscOunt - P9,775 X 6% x 90/360

(remaining days) ………………………………………. 147 9,628

Net gain on forelgn currency ……………………………………………………… P3,193 (d)

"present value

87. What is the gain or loss on available -for-sale security /FVTOCI on June 30, 20x7?

a. P 2,184 gain c. P54,945 gain

b. P54,945 loss d. P71,429 gain

solution:

87. (c)

Net gain or loss on available-for-sale security /FVTOCİ, June 30, 20x7:

From Investment:

Gain as a result of changes in equity price - OCI:

[(FC 100,000 x FC 2,000)- (FC 100,000 x P1.50]]

= FC 50,000 gain/.70 …………………………………………… P71,429

Loss as a result of foreign exchange rates as measured

by spot rates on the original FC 100,000 balance:

[(FC 100,000/0.70) - (FC 100,000/0.65) ……………………………………… ( 10,989)

Loss as a result of changes in foreign currency as

measured by spot rates on the incremental

FC 50,000 balance arising during prior period:

[(FC 50,000 / 0.70) - (FC 50,000 / 0.65)] …………………………………… ( 5,495)

Net gain, June 30, 20x7 ………………………………………………………………………………. P54,945 (c)

88. What is the net foreign exchange gain or loss on foreign currency on June 30, 20x7?

a. P2,184 gain c. P54,945 gain

b. P54,945 loss d. P71,429 gain

solution:

88. (a)

Net foreign exchange gain or loss, June 30, 20x7:

Loss (in investment) as a result of changes in foreign exchange rates:

[(FX 100,000 / 0.70) - (FC 100,000 / 0.65)], measured

at spot rates ……………………………………………………………. P(10.989)

Hedging Instrument / Forward Contract:

1/1/20x7: Original! Forward Rate:

FC 100,000 / 0.62 …………………………………………. P161,290

6/30/20x7: Spot Rate: FC 100,000 / 0.70 ……………………………… 142,857

Total gain on hedging instrument ………………………………………... P 18,433

Less: Gain on hedging instrument, 3/31/20x7 ………………. 9,628 8,804

Net gain on foreign currency ………………………………………………….. P 2.184 (a)

89. What is the fair value of the forward contract on June 30, 20x7?

a. P 2,184 c. P54,945

b. P18,433 d. P71,429

solution:

89. (b) - rater to No. 88 for computation.

Speculation - Hedge Accounting is Not Applicable

Items 90 and 91 are based on the following information:

On November 1,20x7, Cream line Dairy Corp. concluded that the Thailand baht would weaken

during the next six months because of the coup that transpired recently. In hopes of reporting a gain,

Cream line entered into a foreign exchange forward for speculation on November 1, 20x7, to sell

1,000,000 baht on April 30, 20x8 at the forward rate.

11/1 /20X7 12//31/x7 4/30/x8

Spot rate (baht)…………………………………………. P1.190 P1.180 P1.210

Forward rate (baht) ..................................... 1.199 1.187 1.210

90. The December 31,20×7 profit and loss statement, foreign exchange gain or loss on forward

contract amounted to:

a. P10,000 gain c. P12,000 gain

b. P10,000 loss d. P12.000 loss

solution:

90. (c)

11/01/20x7: Original forward rate (180 days) ……………………………………. P1.199

12/31/20x7: Current (remaining) forward rate (120 days) …………………… 1.187

Forex gain per unit.................................................................................. P .012

Multiplied by: Number of foreign Currencies ……………………………………… 1000,000

Foreign exchange gain ……………………………………………………………………….. P 12,00Q (c)

in speculating. one is merely trying to gain - not to create an offsetting position.

Foreign exchange forwards used in speculations are valued at the change in the forward

rote for the remaining life of the contract.

91. On April 30, 20x8, foreign exchange gains or loss on forward contract amounted to

(Ignoring any discount reversal):

a. P23,000 loss c. P30,000 loss

b. P23,000 gain d. P30,000 gain

solution:

91. (a)-refer to No. 68 for further discussion.

12/31/20x7: Cuent (remaining) forward rate (120 days] ……………………………… P 1.187

4/30/20x8: Spot rate …………………………………………………………………………………… 1.210

Forex loss per unit ………………………………………………………………………………………. P .023

Multiplied by: Number of forelgn currencies …………………………………………….. 1,000,000

Foreign exchange loss due to speculation. …………………………………………………. P 23,000 (a)

Items 92 and 93 are based on the following information:

On December1, 20x7, Albert Company enters into a forward Contract tor speculative purposes to acquire
100,000 Mexican New Peso on March 1,20x8, a Currency in which the company has no receivables,
payables or commitments. The firm's fiscal year-ends on December 31.

Following are the spot rates and forward rates to various dates:

12/31 /xX7 12/1/20x7 3/1/X8

Spot rate (New Peso)……………………………. P2.35 P2.40 P2.42

Forward rate (New Peso) ........................ 2.36 2.37 2.42

92. The December 31,20x7 profit and loss statement, foreign exchange gain or loss on

forward contract amounted to:

a. P1,000 loss c. P5,000 gain

b. P1,000 gain d. P5,000 loss

solution:

92. (b) - refer to No. 90 for further discussion,

12/01/2Ox7: Original forward rate (90 days] ……………………………………. P2.36

12/31/20x7: Current. (remaining) forward rate (60 days) …………………………. 2.37

Forex gain per unit …………………………………………………………………………………… P .01

Multiplied by: Number of foreign currencies …………………………………………… 100,000

Foreign exchange gain …………………………………………………………………………….. P 1,000 (b)

93. On March 1, 20x8 foreign exchange gains or loss on forward contract amounted to:

a. P5,000 loss c. P2,000 gain

b. P5,000 gain d. P2,000 loss

solution:

93. (b)

12/31/20x7: Current (remaining) forward rate (120 days) ……………………………….. 2.37

3/01/20x8: Spot rate ………………………………………………………………………………………. 2.42

Forex gain per unit ………………………………………………………………………………………….. P .05

Multiplíed by: Number of foreign curencies ……………………………………………………. 100,000

Foreign exchange gain due to speculation ………………………………………………………. P 5,000 (b)

94. On September l,20x7, Brady Corp. entered into a foreign exchange contract for speculative

purposes by purchasing 50,000 deutsche marks for delivery in 60 days. The rates to exchange

follow:

9/1 /20x7 9/30/20x7

Spot rate …………………………………….. P21.00 P21.50

30-day forward rate ………………………….. 20.98 20.00

60-day forward rate ………………………… 20.99 22.10

In its September 30, 20x7, income statement, what amount should Brady report as foreign

exchange transaction gain (loss)?

a. P(49,000) c. P27,500

b. P55,500 d. (49,500)

solution:

94. (d)–refer to No. 90 for further discussion.

9/01/20x7: Original! forward rate (60 days) ............................................. P 20.99

12/31/2Ox7: current (remaining) forward rate (30 days) ………………………. 20.00

Forex loss per Unit ................................................................................... .99

Multiplied by: Number of foreign currencies ………………………………………. 50,000

Foreign exchange loss due to speculation …………………………………………………….. P 49,500 (d)

combination contracts:

items 95 through 98 are based on the following Information:

on December 12, 20x7, Imp Co. entered into three forward exchange contract, each to purchase 100,000
foreign currencies (FC) is 90 days. The relevant exchange rates are as follows:

Forward Rate

spot rate (for March 12, 20x8)

November 30, 20x7 ………………………….. P.87 P.89

December 12, 20x7…………………………… .88 .90

December 31, 20x7……………………………. .92 .93

95. Imp entered into the first forward contract to hedge a purchase of inventory in November 20x7,

payable in March 20x8. At December 31, 20x7, what amount of foreign currency transaction gain

from his forward contract should Imp include or net income?

a. P 0 c. P5,000

b. P3,000 d. P10,000

solution:

95. (b)

12/12/2Ox7: Original forward rate (90 days) ………………………………………. P 90

12/31/20x7: Current (remaining) forward rate (71 days)……………………… 93

Forex gain per unit……………………………………………………………………………….. P 03

Multiplied by: Number of foreign currencies ………………………………………. 100,000

Foreign exchange gain due to hedging of exposed liability ………………….. P 3.000 (b)
96. At December 31, 20x7, what amount of foreign currency transaction loss should Imp include in

income from the revaluation of the accounts Payable of 100,000 foreign currencies (FCs) incurred

as a result of the purchase of inventory at November 30, 20x7, payable in 20x8?

a. P 0 c. P4,000

b. P3,000 d. P5,000

solution:

96. (d)- Importing transaction

12/12/20x7: Spot rate (date of transaction) ……………………………………………… P .87

12/31/20x7: Spot rate (balance sheet date) ………………………………………………. .92

Forex gain per unit………………………………………………………………………………………. .05

Multiplied by: Number of foreign currencies ……………………………………………… 100,000

Foreign exchange loss due to revaluation of accounts payable …………………… P 5.000 (d)

97. Imp entered into the second forward contract to hedge a commitment to purchase equipment

being manufactured to Imp's specifications. The expected delivery date is March 20x7 at which

time settlement is due to the manufacturer. The hedge qualifies as a fair value hedge. At December

31, 20x7, what amount of foreign cumency transaction gin from this forward contract should Imp

include in net income?

a. P 0 c. P 5.000

b. P 3,000 d. P10,000

solution:

97. (b)

12/12/20x7: Original forward rate (90 days) ………………………………………….. P.90

12/31/20x7: Current (remaining) forward rate (71 days)…………………………. .93

Forex gain per unit...................................................................................... .03

Multiplied by: Number of foreign currencies …………………………………………… 100,000

Foreign exchange gain due to foreign currency commitment ………………….. P 3.000 (b)
98. Imp entered into the third forward contract for speculation. At December 31, 20x7, what amount of

foreign currency transaction gain from this forward Contract should Imp include in net income?

a. P 0 c. P 5,000

b. P3,000 d. P10,000

solution:

98. (b)-refer to No. 90 for further discussion.

12/12/20x7: Original forward rate (0 days)……………………….. P .90

12/31/20x7: Current (remaining) forward rate (71 days) ………….. .93

Forex gain per unit………………………………………………………………….. P .03

Multiplied by: Number of foreign currencies ………………………… 100,000

Foreign exchange gain due to speculation ……………………………….. P 3,000 (b)

Hedging of a Net Investment in n Foreign Entity using a Derivative Instrument -

Hedge Accounting Applies

items 99 and 100 are based on the following information:

On December 31, 20x7, Indoy Company. the parent of the 100% owned Japanese subsidiary

expected the yen to weaken by the end of 20x8. Accordingly, Indoy Company, the parent

contracted with a foreign exchange trader on December 31, 20×7. to sell 2,300,000 yens (the

subsidiary's net asset position at that date in 365 days at the forward rate of P.435. The

following direct exchange rates follows:

12/31 /2OX7 12/31/x8

(the inception (the expiration date and

date) financial reporting date)

Spot rate ……………………………. P.440 P.400

Forward rate (selling forward)............ .435 . 400

The January 1, 20x8 balance of the translation reserve (cumulative) – debit counted to

P129,000 and translation reserve loss for 20x8 of P100,000.

99. The December 31, 20x8 foreign exchange gain or loss on forward contract to be charged to

amounted to:

a. P80,500 gain – OCI C. P80,500 loss - OCI

b. P80,500 gain – earnings d. P92,000 gain – OCI

solution:

99. (a)

12/31/2Ox7: Original forward rate (365 days) ………………………………… P .435

12/31/20x8: Spot rate ……………………………………………………………………. .400

Forex gain per Unit ………………………………………………………………………… P .035

Multiplied by: Number of foreign currencies …………………………………… 2,300,000

Foreign exchange gain – OCI …………………………………………………………… P 80,500 (a)

A hedge of the foreign currency exposure of a net investment in o foreign operation

may result in a gain or o loss. Assuming the hedge is designated as such, the gain or loss

Should be reported in the same way that the translation adjustment is reported to the

extent that the hedge is effective. Therefore, the gain or loss traceable to hedge

effectiveness will! be reported as a component of equity.

100. The December 31,20x8, translation reserve balance (cumulative translation adjustment)

amounted to:

a. P148,500 debit c. P309,500 debit

b. P229,500 debit d. P148,500 credit

solution:

100. (a) -refer.to No. 99 for further discussion.

Cumulative Translation Reserve - 0CI

January 1, 20x8 balance 129,000 80,500 foreign exchange gain-

Forward (No. 99)

F/S translation reserve- loss 100,000

December 31, 20x8…………… 148,500

Items 101 through 102 are based on the following information:

Dudongski Inc. uses the closing rate method (net investment method or current rate method as required
by PAS 21 wherein the functional currency is not the Currency of a hyperinflationary economy) of
translation for its 100%-owned foreign subsidiary, Dong Suzuki (created in 20x7). For 20x8, Dong Suzuki’s
net income was 100,000 LCU (local currency unit, the yens), which translated into P33,000.

(Earnings occurred evenly throughout the year and were remitted to Dudongski Inc. monthly). An
unfavorable translation reserve/adjustment of P64,000 resulted for 20x8. At December 31, 20x7, the
Cumulative translation reserve account had a credit balance of P18,000 On December 31, 20x7, in
expectation that the LCU (the yens) would weaken throughout.20x8, the management entered into a
one-year forward exchange contracts s to sell 600,000 LCU (Dong Suzuki’s net asset position at
December 31, 20X7) on December 31, 20x8 at the forward rate of P.40 (No hedging was done in 20x7).
The following direct exchange rates are assured:

12/31 /20X7 6/30/X8 12/31/20x8

(the inception date) (a financial reporting date) (expiration date)

Spot rate ……………… P.42 P.37 P.30

Forward rate (selling forward) …….. 40 36 30

101. The June 30, 20x8 foreign exchange gain or loss on forward contract amounted to:

a. P24,000 gain- earnings c. P30,000 gain - OCI

b. P24,000 gain – OCI d. P24,000 loss - OCI

solution:

101. (b) -refer to No. 99 for further discussion.

12/31/20x7: Original forward rate (1 year) ………………………………… P.40

6/31/20x8: Current (remaining) forward rate (6 months) ………………… 36

Forex gain per unit………………………………………………………………………… P .04

Multiplied by: Number of foreign currencies …………………………………… 600,000

Foreign exchange gain – OCI ………………………………………………………….. P 24.000 (b)

102. The June 30, 20x8, translation reserve balance (cumulative translation adjustment) amounted t0:

a. P22,000 debit balance c. P42,O00 credit balance

b. P22,000 credit balance d. P24,000 credit balance

solution:

102. (a) -refer to No. 93 for further discussion.

Cumulative Translation Reserve - 0CI

F/S translation reserve – loss …….. 64,000 18,000 December 31. 20x7 balance

24,000 Foreign exchange gain

forward (No. 101)

June 30, 20x8 22,000 (a)

103. The December 31, 20x8 foreign exchange gain or loss on forward contract amounted to:

a. P36,000 gain – earnings c. P36,000 gain - OCI

b. P42,000 gain – OCI d. P36,000 loss – OC

solution:

103. (c)

6/30/20x8: Current (remaining| forward rate (6 months) ………………………. P.36

12/31/20x8: Spot rate …………………………………………………………………………….. .30

12/31/20x8: Spot rate …………………………………………………………………………….. P.06

Forex gain per unit…………………………………………………………………………………… 600,000

Multiplied by: Number of foreign currencies …………………………………………… P 36,000 (c)

Foreign exchange gain – OCI ………………………………………………………………….. P 3,000 (b)

104. The December 3 1,20x8, translation reserve balance (cumulative translation adjustment)

amounted to:

a. P22.000 debit balance c. P14,000 credit balance

b. P36,000 debit balance d. P 14,000 debit balance

solution:

104. (c)

Cumulative Translation Reserve - OCI

Foreign exchange gain- 22,000 36,000June 30, 20x8 balance (No. 102)

forward (No. 103)

(c) December 31, 20x8 14,000

Hedging of a Net Investment in Foreign Entity using a Nonderivative Instrument

Hedge Accounting Applies:

ltems 105 through 109 are based on the following information:

On January 1, 20x7, Inday Garutay Products, nc. decide to hedge the portion of its investment that it just
made in Indian company that is related to the book Value of Indian Company's net assets. Inday is unsure
whether the direct exchange (ate for Indian rupees will increase or decrease for the year and wishes to
hedge its net asset investment. On January 1, 20x7, Inday's 100% ownership share of Indian Company's
net assets is equal to 50,000,000 rupees (40,000,000 rupee capital stock plus 10,000,000 rupees retained
earnings). Inday borrowed 50,000,000 rupees, at a 5% rate of interest to hedge its investment in Indian
Company, and the principal and interest are due and payable on January I, 20x8. A favorable translation
reserve/adjustment of P950,000 resulted for 20x7. At December 31, 20x6, the Cumulative translation
reserve account had a credit balance of P11,000,000.

The relevant direct spot exchanges (Peso/Rupee) are:

Date Rate

January 1,20x7 .......................................... P1.20

October 1, 20x7………………………………………. 1.36

December 31,20x7 ..................................... 1.40

20x7 average............................................... 1.30

105. The December 31.20x7 Loans payable account balance obtained to hedge the net investment

amounted to:

a. P60,000,000 c. P68,000,000

b. P65,000,000 d. P70,000,00

solution:

105. (d)

12/31/20x7: Current Spot rate ………………………………………. P 1,40

Multiplied by: Number of foreign currencies ………………….. 50,000,000

Loan payable, December 31, 20x …………………………………. P70,000,000 (d)

106. The December 31, 20x7 the foreign exchange gain or loss due to hedge of its net investment:

a. P20,000,000 loss – OCI c. P10,000,000 gain - OCI

b. P10,000,000 loss – OCI d. P10,000,000 gain - earnings

solution:

106. (b) - Hedging using a Nonderivative instrument

6/01/20x7: Spot rate …………………………………………………………………….. P1.20

12/31/20x7: Spot rate ……………………………………………………………………. 1.40

Forex loss per unit ............................................................................. P .20

Multiplied by: Number of foreign cUTencies ………………………………… 50,000,000

Foreign exchange loss – OCI …………………………………………………………… P10,000,000 (b)

107. The December 31, 20X7:

Interest Expense Interest Payable

a. P3,500,000 P3,500,000

b. P3,250,000 P3,500,000

c. P3,250,000 P3,250,000

d. 0 0

solution:

107. (b)

Interest expense: 50,000,000 rupees x 5% x P1.30 average

exchange rate (translating expense account under

PAS NO. 21, wherein spot rate would not be practical

to be determined, average rate may be used) …………………………………… P3,250,000

Interest payable: 50,000,000 rupees x 5% x P1.40 Current rate

(translating liability account under PAS No. 21 requires

the use of current rate at the balance sheet date) …………………………………. 3,500,000 (b)

Foreign Currency translation loss …………………………………………………………………….. P 250,000

Incidentally, the entry to record the interest would be:

Interest expense ...................................................... 3,250,000

Foreign currency transaction loss............................. 250,000

Interest payable 3,500,000

108. The December 31, 20x7 foreign exchange gain or loss traceable to hedge ineffectiveness amounted

to:

a. P 0 C. P250,000 loss - current earnings

b. P250,000 gain - current earnings d. 250,000 loss - OCI

solution:

108. (c) - refer to No. 107 for computation. Note that the amount of the offset to equity

account is limited to the effective portion of the hedge based on the revaluation

of- the assets. Any excess is taken directly to the income statement.

109. The December 31,20x7, translation reserve balance (cumulative translation adjustment) amounted

to:

a. P1,950,000 credit balance c. P950,000 credit balance

b. P1,950,000 debit balance d. P950,000 debit balance

solution:

109. (a)

Cumulative Translation Reserve - 0CI

Foreign exchange loss 11,000,000 December 31, 20x8 balance

(No.106) ………………………..10,000,000 950,000 F/S translation gain

1.950,000 (a)

items 110 through 112 are based on the following information:

Noting that there was a P5,780,000 translation adjustment gain, Dora Inc. (the parent company)

secured a foreign bank loan denominated in the functional currency when the spot rate was 1

Taiwan Nt dollar = P1.022. The bank loan has a principal amount of 200,000,000 Nt dollars.

Interest calculations are ignored. The bank loan is designated as a hedge of net investment and

is considered to have satisfied all necessary criteria.

Selected exchange rates between the functional currency (Nt dollar) and the peso are as follows:

Date Rate

January 1,20x7 ………………………………………………. P .98

October T, 20x8................................................... 100

December 31,20x8.............................................. 1.05

20X8 average ………………………………………………….. 1.03

110. The December 31,20x8 Loans payable account balance obtained to hedge the net investment

amounted to?

a. P196,000,000 c. PP206,000,000

b. P200,000,000 d. P210,000,000

solution:

110. (d)

12/31/20x8: Current spot rate ……………………………………….. P 1.05

Multiplied by: Number of foreign Currencies …………………. 200,000,000

Loan payable, December 31, 20x8 …………………………………. P210,000,000 (d)

111. The December 31, 20x8 the foreign exchange gain or loss due to hits net investment:

a. P5,600,000 loss – OCI c. P 5,600,000 gain - OCI

b. P5,600,000 loss - earnings d. P14,000,000 loss - OCI

solution:

111. (a)

Date of loan obtained: Spot rate ……………………………. P 1.022

12/31/20x8: Spot rate …………………………………………… 1.050

Forex loss per unit ..................................................... P.028

Multiplied by: Number of foreign currencies ……………. 200,000,000

Foreign exchange loss – OCI ……………………………………. P 5,600,000 (a)

112. The December 31,20x8, translation reserve balance (cumulative translation adjustment) amounted

to:

a. P180,000 credit balance c.P5,600,000 debit balance

b. P180,000 debit balance d. None

solution:

112. (a)

Cumulative Translation Reserve – OCI

Foreign exchange loss (No.111) ..... 5,600,000 5,780,000 F/S translation gain

180,000 (a)
MULTIPLE CHOICE THEORIES

1. Which of the following statements is not correct with regard to foreign currency hedges?

a. They are executory contracts c. They manage foreign exchange fluctuation risk
b. They can only be used by large companies d. They establish a fixed exchange rate between
currencies

2. A foreign currency forward contract has which of the following features?

α. The exchange of the currency may or may not occur

b. The parties to the contract do not know the number of currency units that will be exchanged until
the date the forward contract matures
c. The parties to the contract must record journal entries at the date the forward
d. contract is established the parties to the contract must exchange the currency regardless of the
exchange rate on the date the forward contract matures

3. Which of the following statements is not correct with regard to foreign currency forward contracts?

a. The contract is between an individual buyer and seller

b. The parties do not have to exchange the currency if the exchange rate is not favorable
c. The forward contract can be for any number of currency units
d. The exchange can take place at any time

4. What is the relationship between the foreign currency spot rate and the forward rate?

a. The spot rate is always higher

b. The forward rate is always higher
c. The two rates always start out the same
d. The rates can be different (either can be nigher or they can be the same

5. Which of the following statements is correct with regard to accounting for a foreign currency sale on
credit and an accompanying foreign currency forward contract?

a. Accounting for the change in the value of the accounts receivable at the balance sheet date is based
on the change in the forward exchange rate
b. it is not necessary to account for the accounts receivable because the company has a forward
contract
c. The accounting for the accounts receivable is the same regardless of whether the company
hedges the receivable with a forward contract or not
d. Changes in the fair value of the forward contract are only recognized at the date the accounts
receivable are collected

6. Which of the following statements is correct with regard to accounting for a foreign currency sale on
credit and an accompanying foreign currency forward contract?

a. Accounting for the change in the value of the accounts receivable of the balance sheet date is
based on the difference between the spot rate and the forward rate at that date
b. It is not necessary to recognize the foreign currency forward contract in the financial records at
the date the contract is created
c. it is not necessary to account for the accounts receivable because the company has a forward
contract
d. Changes in the fair value of the forward contract are based on the change in the spot rate

7. Over what time period is a hedge of a foreign currency commitment on a purchase transaction
applicable?

a. From the date of the commitment until the date of settlement

b. From the transaction date until the settlement date
c. From the date of the commitment until the transaction date
d. From the date of the commitment until the balance sheet date

8. Which of the following is not a potential recognition date when a foreign currency commitment
exists?

a. Balance sheet date c. Transaction date

b. Establishment date of hedge d. Settlement date of hedge

9. Which of the following statements is correct with regard to a foreign currency commitment hedged
with a forward contract?

a. The foreign commitment hedge period ends on the date the underlying transaction is settled
b. The gain or loss on the foreign currency commitment forward contract is offset by losses or gains
pertaining to the sales amount or the recognized asset value at the transaction date
c. The forward contract is valued at the difference between the forward exchange rate and the spot
rate
d. The gain or loss on the forward contract is recognized only on the date of the underlying transaction

10. Which of the following statements is not correct with regard to forecasted foreign currency
transactions?

a. Management may initiate a hedge with regard to forecasted foreign currency transactions
b. For a forecasted foreign currency transaction to exist, an expectation of a continuing relationship
with a foreign entity must occur
c. Management often prepares budgets based on forecasted foreign currency transactions
d. For a forecasted foreign currency transaction to exist, a contract for a future purchase or sale
must occur

11. When does the change in value of a hedge instrument for a forecasted foreign currency transaction
affect the income statement?

a. In the period in which the exchange rate fluctuates

b. When the forecasted transaction affects the income statement
c. When the forecasted purchase or sale occurs
d. The change in value of a hedge instrument for a forecasted foreign currency

12. Which of the following statements is not correct with regard to a forecasted foreign currency
transaction hedged with a forward contract?

a. The gain or loss due to fluctuating exchange rates is initially recognized in other comprehensive
Income
b. A journal entry is not required at the time the hedge is established
c. A purchase or sales commitment is revalued at the date the forward contract Is revalued
d. The forward contract must be revalued at the balance sheet date

13. Which of the following statements is not correct with regard to speculative foreign currency
contracts?

α. The gain or loss from a speculative contract is included in other

b. Speculative contracts can be created with forward contracts and option contracts
c. A speculative contract created with a forward contract does not require a journal entry at
establishment while a speculative contract created with an option contract does require a journal
entry at establishment.
d. The hedge instrument must be revalued to its fair value at balance sheet dates

14. A forward exchange contract is being transacted at a premium If the current forward rate is:

a. less than the expected spot rate c. less than the current spot rate
b. greater than the expected spot rate d. greater than the current spot rate

15. Which of the following factors Influences the spread between forward and spot rates?

a. which currency is denominated as the domestic currency

b. the length of the forward exchange contract
c. the current cross rate between the two currencies
d. all are factors that may influence the spread

16. Foreign currency transactions not involving a hedge should be accounted for using

a. the one-transaction method.

b. the two-transaction method.
c. a hybrid of the one and two-transaction methods.
d. either the one or the two-transaction method (allowed by the FASB).
17. Which of the following does not represent on exchange risk on an exposed position to a company
transacting business with a foreign vendor?

a. transaction is denominated in foreign currency, settled at a future date

b. firm commitment to purchase inventory to be paid for in foreign currency
c. Forecasted foreign currency transaction with a high probability of occurrence
d. firm commitment to purchase inventory denominated in pesos

18. On August 1, a Philippine company enters into a forward contract, in which it agrees to buy FC
(foreign currencies) 1,000,000 from a bank at a rate of P1.495/FC on December 1. Changes in the value
of the forward contract will be reported in other comprehensive Income on the balance sheet in which
one of the following situations?

a. The Philippine company has receivables denominated in FCs, with payment to be received on
December 1
b. The Philippine company sold merchandise to a customer in a foreign country on August 1, and
expects payment of FC 1,000,000 on December 1.
c. The Philippine company plans to sell merchandise to a customer in a foreign country on August 1,
with payment of FC1,000,000 expected on December 1.
d. The Philippine company plans to purchase merchandise from a supplier in foreign country, with
payment of FC 1,000,000 expected to be paid on December 1

19. Exchange gains and losses on a forward exchange contract that covers the same time period as the
transaction which it provides a hedge for should be recognized as

a. an extraordinary Item.
b. part of the original sales transaction.
c. Income from continuing operations.
d. Income from continuing operations, but only if material.

20. May a derivative instrument Financial Instrument be a:

Financial Other Financial Other

Instrument? Contract? Instrument? Contract?
a. Yes Yes c. No Yes
b. Yes No d. No No

21. Inter-Coastal Company acquired a sixty-day forward contract for 500,000 euros. With respect to that
derivative instrument, the underlying is:

α. The euro currency c. 500,000 euros

b. The forward rate d. The Philippine peso amount of the contract

22. How are Investments in financial derivatives valued on the balance sheet?

a. Market value c. Lower of cost or market value

b. Cost d. Not reported

23. On December 1, a Philippine company agrees to buy euros on February 1 at a contract price of
P64.00. The exchange rate for euro declines to P63.50 (Philippine strengthens) between December and
December 31, when the company's reporting year ends. How is this contract reported on the company's
year-end balance sheet?

a. In the asset section.

b. In the liability suction
c. As a contra asset
d. The contract is not reported on the balance sheet,

24. A Philippine company has entered into a forward purchase contract to hedge a reported foreign
currency obligation. It the peso weakens against the foreign currency.

a. the forward contract appears as a current asset on the company's balance sheet.
b the forward contract's reported value exactly offsets the reported foreign currency obligation, with
no net balance sheet disclosure.
c. the gain on the forward contract adds to other comprehensive income.
d. the gain on the foreign currency obligation adds to other comprehensive income

25. A Philippine company has euro-denominated receivables that it hedges with a forward sale of euros.
the euro weakens against the Philippine peso. Which statement is true?

a. The gain on the receivables and the loss on the forward are reported on the Income statement.
b. The gain on the receivables and the loss on the forward are reported in other comprehensive
income.
c. The loss on the receivables and the gain on the forward am reported on the Income statement.
d. The loss on the receivables and the gain on the forward are reported in other comprehensive
income.

26. A Philippine company has payables to suppliers denominated in euros, and hedges these payables
with foreign currency forward purchase contract. The euro strengthens against the Philippine peso.
Which statement is true?

a. The gain on the payables and the loss on the forward are reported on the Income statement
b. The gain on the payables and the loss on the forward are reported in other comprehensive Income.
c. The lost on the payables and the gain on the forward are reported on the Income statement.
d. The lost on the payables and the gain on the forward are reported in other comprehensive Income.

27. On July 10, 20x4 o Philippine company with a December 31 year-end enters a forward contract that
lock purchase price of won, for delivery on August 15, the forward Contract hedges a firm commitment
to buy merchandise from a supplier in Korea, with payment denominated in won the purchase is made
on August 1. 20x4 and payment made of August 15. The Philippine company sell the merchandise in
September Where is the out the tem commitment to purchase reported in the year-end financial
statement for 20x4?
a. asset or liability on the balance sheet
b. Increase or decrease in other comprehensive income
c. adjustment to sales revenue
d. adjustment to cost of goods sold

28. To achieve matching of hedge gain and losses against rates and gains on the hedges Rem, accounting
for qualified hedges of firm commitments denominated in foreign currency

a. uses hedge accounting for the fem commitment investment but not the hedge

b. uses hedge accounting for the hedge investment, but not the firm commitment

c. uses hedge accounting for both the hedge investment and the firm commitment

d. does not use hedge accounting for both the hedge investment or the firm commitment

29. On July 10, 20x4 o Philippine company with a December 31 year-end enters a forward contract that
locks in the selling price of won for delivery on August 15. The forward contract hedges a firm
commitment to sell merchandise to a customer in Korea, with payment denominated in won. The sale is
made on August 1, 20x4 and payment a received from the customer on August 15. Where it the value of
the firm commitment to sell reported in the year-end financial statements for 20x4?

a. asset or liability on the balance sheet

b. increase or decrease in other comprehensive income
c. adjustment to sales revenue
d. adjustment to cost of goods sold

30. To achieve matching of hedge gains and losses against losses and gains on the hedged Item,
accounting for qualified hedges of forecasted transactions denominated in foreign currency

a. uses hedge accounting for the forecasted transaction but not the hedge investment
b. uses hedge accounting for the hedge investment, but not the forecasted transaction.
c. uses hedge accounting for both the hedge Investment and the forecasted transaction
d. does not use hedge accounting for either the hedge investment or the forecasted transaction

31. A Philippine company hedges on anticipated purchase of merchandise from a us supplier, payment
to be made in pounds the hedge qualities as a cash flow hedge of a forecasted transaction when are
gains and loss on the hedge investment reported on the income statement?

a. When the company takes delivery of the merchandise

b. When the company pays for the merchandise
c. As the market valve of the hedge investment changes
d. When the company tells the merchandise

32. A Philippine company hedges an anticipated sale of merchandise to a UK customer. payment to be

received in pounds. the hedge qualities as a cash flow hedge of a forecasted transaction when ore gain
and losses on the hedge investment reported on the income statement?

a. When the customer pays for the merchandise

a. When the customer pays for the merchandise

c. As the market value of the hedge Investment changes.

d. when the company report sales revenue on the sale.

33. On August 1 Philippine company enters into a forward contract, in which it agrees to buy 1.000.000
foreign currencies (FC) from a bank at a rate of P1.45 on December 1. Changes in the value of the
forward contract will be reported on the income statement in which one of the following situations?

a. The Philippine company uses the forward contract to hedge a loan denominated in FC.

b. The Philippine company uses the forward contract to hedge a forecasted purchase of merchandise
from a French supplier

c. The Philippine company uses the forward contract to hedge a planned purchase of commodities
from a foreign supplier

d. The Philippine company uses the forward contract to hedge on expected acquisition of
commodities from a foreign company

34. Which of the following situations does not require hedge accounting to match, on the same Income
statement, gains and losses on the hedge with losses and gains on the hedged item?

a. Hedge of a purchase order denominated in another currency

b. Hedge of an investment in a remeasured subsidiary

c. Hedge of a forecasted transaction denominated in another currency

d. Hedge of a sales order denominated in another currency

35. Hedge accounting a not used for hedges of remeasured subsidiaries because

a. It is specifically prohibited in PERS 9.

b The hedges do not meet the strict requirement for effective hedges.
C there is no risk to hedge

d. normal accounting matches gains and losses in the same period.

36. Jollibee Corporation hedges its investments in international subsidiaries. The hedge gains and losses
are reported in other comprehensive income. For the subsidiaries located in foreign countries, which
statement is true?

a. Jollibee's con hedge its investments with foreign currency-denominated borrowing.

b. Jollibee's remeasures the accounts of these subsidiaries before consolidating them.

c. If the foreign currency weakens against the euro. Jollibee's will show translation losses on the
subsidiaries

d. if the foreign currency is expected to strengthen against the euro, Jollibee's will be motivated to do
less hedging of its investments in subsidiaries.

37. The functional currency of Jollibee's subsidiaries is their local currency Which of the following
investments does NOT hedge Jollibee's translation gains and losses?

a. pull option in the subsidiaries' local currency

b. forward sale of local currency
c. long-term debt denominated in the local currency
d. Amortized cost denominated in the local currency

38. A Philippine company enters a forward purchase contract for speculative purposes When ore gains
and losses on the hedge investment reported on the income statement?

a. When the forward contract changes in market value

b. When the forward contact closed
c. When the forward contact is determined to be an effective hedge.
d. When the merchandise le sold

39. A PERS company uses the bass adjustment for its cash flow hedges of equipment purchases, when is
the gain or loss from the hedge removed from AOCI (equity reserve)?

a. When depreciation le recorded on the equipment.

b. when the hedge in closed.
c. when the equipment is purchased.
d. When the equipment it sold
40. Which statement is NOT correct?

a. In a fair value hedge the entity uses a hedging instrument to hedge against the fluctuation in me for
value of the hedged item. The method will be used when the hedged item will be valued at for value.
b. In a cash flow hedge the entity uses a hedging instrument to hedge against the fluctuation in the
Canadian dollar value of future cash flows.
c. The gain or loss on the hedging Instrument in a cash flow hedge is entity reported in other
comprehensive income and reclassified to profit and loss when the hedged item affects profit
d. The gain or loss on the hedging instrument in a fair value hedge is initially recognized in other
comprehensive income and transferred to profit and loss when the hedged item has be revalued for
accounting purposes in accordance with PFRS,

41. PFRS on speculative forward exchange contrasts requires that the contract be:

a .revalued using spot rates throughout its life with any gain or losses to be deferred and amortized as
they occur
b. revalued at fair value throughout its life with any gains or losses to be deferred and amortized as
they occur
c. valued using spot rates throughout its life with any gains or losses to be taken d. into income as they
occur
d. revalued at fair value throughout it’s the with any gains or losses to be taken into income as they
occur

42. Which of the following would NOT be considered a foreign exchange hedge?

a. The placement of large amounts of Canadian funds with a bank in Zurich.

Switzerland.

b. A foreign currency futures contract

c. A foreign currency option contract

d. A forward exchange contract

43. Which of the following statements accurately describes the manner in which transactions must be
translated under PAS 21?

a. All transactions must be translated into the functional currency of the reporting entity.

b. All transactions must be converted into the local currency of the reporting

entity.

c. All transactions are to be reported into the currency of the jurisdiction where

the majority of shareholders reside.

d. All transactions may be reported into the currency of the country where the

corporation does the majority of its business.

44. Which of the following is correct?

a. The historical rate is the exchange rate on the date of the transaction and

the closing rate is the exchange rate at the end of the reporting period.

b. The historical rate is the exchange rate on the date of the transaction and

the closing rate is the rate on which any hedge transactions mature.

c. The spot rate is the rate on the date of the transaction and the relevant

forward rate is the exchange rate used at the end of the reporting period.

d. None of the above.

45. The rate charged by commercial, banks for the purchase of any foreign currency (in Canadian
dollars)

on any given day would be based on which of the following?

a. The Foreign currency hedge.

b. The forward contract.

c. The spot rate.

d. The forward exchange contract.

46. Which of the following is NOT Currently a cause of fluctuation in foreign exchange rates?
a. Inflation rates.

b. The pegging of a currency to the Philippine peso

c. Interest rates.

d. Trade surpluses and deficits.

47. Which of the following statements is correct?

a. In Philippines, the cost of a unit of foreign currency in Philippine pesos is a

direct quotation, while the cost in that foreign currency of purchasing one in

Philippine pesos is referred to as an indirect quotation.

b. in Philippines, the cost of a unit of foreign currency in in Philippine pesos is an

indirect quotation, while the cost in that foreign currency of purchasing one

in Philippine pesos is referred to as a direct quotation.

c. In Philippines, the cost of a unit of foreign currency in in Philippine pesos is direct

quotation, and the cost in that foreign currency of purchasing one in Philippine

pesos is also referred to as a direct quotation.

d. In Philippines, the cost of a unit of foreign currency in in Philippine pesos is an

indirect quotation, while the cost in that foreign currency of purchasing one in Philippine

pesos is also referred to as an indirect quotation.

48. The ineffective portion of an FX (foreign currency) gain or loss on a fair value hedge must always be

reported currently in

Earnings Other Comprehensive Income

a. Yes Yes

b. Yes No

c. no Yes

d. no no
49. The ineffective portion of an FX (foreign currency) gain or loss on à cash flowhedge must always be

reported currently in.

Earnings Other Comprehensive Income

a. Yes Yes

b. Yes no

c. no Yes

d. No No

50. In a forward-based derivative, the party in the favorable position cannot have which of the following

risks?

a. Credit risk. c. Market risk.

b. liquidity risk d. Off-balance-sheet risk.

51. In a forward-based derivative, the party in the unfavorable position cannot have which of the
following

risks?

a. Credit risk. c. Of-balance sheet risk.

b. Liquidity risk. d. None of the above.

52. Derivative financial instruments are contracts that create

a. right c. Both rights and obligations.

b. obligation d. Neither rights nor obligations.

53. Which of the following is not one of the four types of hedging categories that exist?:

a. Cash value hedges. c. Net investment hedges.

b. fair value hedge d. Undesignated hedges.

54. Which of the following is not one of the four types of hedging categories that exist?

a. Cash flow hedges. c. Net investment hedges.

b. fair value hedges. d. Designated hedges.

55. Hedging an existing FX (foreign currency) receivable arising from an exporting transaction.

a. Cash flow hedges. c. Net investment hedges.

b. Fair value hedges. d. Undesignated hedges.

56. Hedging a firm commitment is a

a. Cash flow hedges. c. Net investment hedges.

b. Fair value hedges. d. Undesignated hedges.

57. Hedging a forecasted transaction is a

a. Cash flow hedges. c. Net investment hedges.

b. Fair value hedges. d. Undesignated hedges.

58. Hedging an investment in equity securities classified as an "FVTPL" security is a.

a. Cash flow hedges. c. Net investment hedges.

b. Fair value hedges. d. Undesignated hedges.

59. FX (foreign currency gains and losses on fair value hedges are

a. Always reported currently in earnings.

b. Initially reported in earnings and later reclassified to other comprehensive income.

c. Initially reported in other comprehensive income and later reclassed earnings.

d. Initially deferred as assets and liabilities.

e. None of the above.

60. FX (foreign Currency) gains and losses on cash flowhedges are

a. Always reported currently in earnings.

b. Initially reported in earnings and later reclassified to other comprehensive income.

c. Initially reported in other comprehensive income and later reclassified to earnings.

d. Initially deferred as assets and liabilities.

61. FX (foreign currency) gains and losses on cash flowhedges are reported in earnings when.

a. The FX (foreign currency gains and losses arise.

b. The transaction on the hedged item is initially recorded.

c. The transaction on the hedged item is initially reported in earnings.

d. None of the above.

62. FX (foreign currency) forwards are valued using

a. The change in the forward. rate.

b. The change in the spot rate.

c. The change in the forward rate or the spot rate, depending on whether the

hedge is a fair value hedge or cash flow hedge.

d. The change in the intrinsic value.

e. None of the above