Question Tag: Derivatives

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  • 6 Marks

QT – Nov 2017 – L1 – Q6c – Elements of Calculus

Determine the optimal production level that minimizes production costs for a company capable of producing 60,000 cans per day.

If, after expanding its facilities, the company is capable of producing 60,000 cans in a day and the total daily cost is given by:

Required:
How many cans per day should they produce in order to minimize production costs?

To minimize production costs, we need to find the value of x that minimizes the cost function. This is done by taking the first derivative of the cost function and setting it equal to zero.

  • 12 Marks

PT – May 2021 – L2 – Q4a – Income Tax Liabilities

Explain the financial costs from derivatives and the tax treatment of such costs.

The following details were taken from the records of KK Company Limited for the 2020 year of assessment.

Item GH¢
Profit before tax 132,000
Total Financial Gain from derivatives 42,000
Total Financial Cost from derivatives 300,000

Required:
i) State what constitutes financial cost from derivatives? (3 marks)
ii) Explain the tax treatment of financial cost from derivatives under a company such as KK Company Limited that is neither a mining nor petroleum company. (2 marks)
iii) Compute and explain the allowable financial cost from derivatives. (3 marks)
iv) Assume all facts are the same except that Financial gain from derivatives is GH¢60,000 and Financial Cost from derivatives is GH¢30,000. Compute and explain the allowable financial cost from derivatives.

i) What Constitutes Financial Cost from Derivatives
Financial costs from derivatives refer to the interest or losses with respect to financial instruments, which are tax-deductible under certain conditions. These instruments include:

  • Debt claims or debt obligations, such as debentures, treasury bills, promissory notes, and bonds.
  • Derivative instruments, which are financial contracts that derive their value from underlying assets, like interest rates, prices, or foreign exchange rates.
  • A foreign currency instrument or any other financial instrument prescribed by regulations or generally accepted accounting principles.
    (3 marks)

ii) Tax Treatment of Financial Cost from Derivatives
The financial costs are allowed as a deduction up to the following limit:

  • The total financial gains derived by the company that are included in its income for the year; plus
  • 50% of the company’s chargeable income for the year, excluding financial gains or deductions for financial costs.

Any disallowed financial costs may be carried forward for five years.

iii) Computation of Allowable Financial Cost from Derivatives

Since the total financial cost was GH¢300,000, the disallowed amount will be GH¢63,000 (300,000 – 237,000), which can be carried forward for the next five years.

iv) Computation of Allowable Financial Cost (Revised Figures)

In this case, since the total financial cost is only GH¢30,000, the entire amount is allowed, and no amount will be carried forward.

  • 5 Marks

FM – Nov 2019 – L2 – Q3c – Futures and hedging with futures

Explain the differences between forward contracts and futures contracts.

c) Explain TWO (2) differences between forward contracts and futures contracts. (5 marks)

Differences between Forward Contracts and Futures Contracts:

  1. Standardization:
    • Forward Contracts: These are non-standardized contracts that are customized based on the specific needs of the parties involved. They are traded over-the-counter (OTC).
    • Futures Contracts: These are standardized contracts with fixed terms, such as quantity, quality, and delivery date, that are traded on organized exchanges.
  2. Trading Venue:
    • Forward Contracts: Forward contracts are traded privately between parties without a centralized marketplace.
    • Futures Contracts: Futures contracts are traded on organized exchanges with the involvement of a clearinghouse that guarantees the performance of the contract.

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