Question

b) AASB121 ‘Foreign Currency Translation’ governs accounting for foreign currency translation. Discuss and give an example...

b) AASB121 ‘Foreign Currency Translation’ governs accounting for foreign currency translation. Discuss and give an example of one type of translation regulated by AASB 121

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Answer #1

Mr. A bought a forward contract for three months of US$ 1,00,000 on 1st December at 1 US$ = Rs 47.10 when exchange rate was US$ 1 = Rs 47.02. On 31st December when he closed his books exchange rate was US$ 1 = Rs 47.15. On 31st January, he decided to sell the contract at Rs 47.18 per dollar. Show how the profits from contract will be recognised in the books.
Solution
Since the forward contract was for speculation purpose the premium on contract i.e. the difference between the spot rate and contract rate will not be recorded in the books. Only when the contract is sold the difference between the contract rate and sale rate will be recorded in the Profit & Loss Account.
Sale Rate. Rs 47.18
Less: Contract Rate. (Rs 47.10)
Premium on Contract. Rs.0.08
Contract Amount. US$ 1,00,000
Total Profit (1,00,000 x 0.08). Rs. 8,000

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