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What is a forward contract, and how discounts and premiums on it are treated under US...

What is a forward contract, and how discounts and premiums on it are treated under US GAAP and IFRS?

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Answer #1

A forward contract is an agreement or a contract between two parties (Buyer and Seller of future contract) that gives the buyer of contract to right and obligation to purchase the specified asset (specified in contract) at the contracted price at a future contracted date. Unlike future contracts, forward contracts are private agreements and are not standardized.

Premium treatment under US GAAP

Forward premium is when the forward or the expected future price is greater than the spot price. US GAAP donot permit accounting premium as income when used as hedging instrument.

Discount treatment under US GAAP

Forward discount is when the forward or the expected future price is lower than the spot price. US GAAP donot permit accounting discount as expense when used as hedging instrument.

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