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- 6 Marks
Question
a) Nyinahini Ltd (Nyinahini) is a company reporting under IFRS. Nyinahini normally operates only within the country where its buildings are physically located. Recently, it entered into a contract to supply its products to a new client based in South Africa. All the work was completed in the period October to November 2018. The (fixed) contract price of 100 million Rand has been agreed upon as denominated in South African Rand. The full amount was invoiced on 1 December 2018 when the exchange rate was GH¢1 = 10.1889 Rand. The new client paid 50 million Rand in advance on 1 November 2018 when the exchange rate was GH¢1 = 9.9783 Rand. The balance will be paid in two equal instalments on 31 March 2019 and 30 June 2019. The exchange rate at 31 December 2018 was GH¢1 = 10.5037 Rand.
Nyinahini decided to eliminate exchange rate differences on the final two payments and entered into two forward rate agreements on 1 December 2018 to sell the appropriate amount of Rand on 31 March 2019 and 30 June 2019, and set up the relevant documentation to treat them as fair value hedges of the recognized receivables. At 31 December 2018, the two contracts for settlement on 31 March 2019 and 30 June 2019 were valued at GH¢148,000 collectively, as an asset from Nyinahini’s point of view.
Required:
Set out and discuss the accounting treatment of the above items, including relevant calculations, as the information provided permits, in the financial statements of Nyinahini for the year ended 31 December 2018.
(6 marks)
Answer
- Accounting for Foreign Currency Transactions (IAS 21)
- Initial recognition of the sale: The full contract price of 100 million Rand is recognized as sales revenue and a receivable at the exchange rate on 1 December 2018, i.e., GH¢9,814,602 (100 million / 10.1889).
- Advance payment accounting: The advance payment of 50 million Rand is initially recorded as deferred income at GH¢5,010,874 (50 million / 9.9783). Upon invoicing on 1 December 2018, an exchange gain of GH¢103,573 (GH¢5,010,874 – GH¢4,907,301 [50 million / 10.1889]) is recognized in profit or loss when 50 million Rand of the total receivable is derecognized.
- Remeasurement of the Receivable at Year-End:
- The remaining 50 million Rand receivable is retranslated at the year-end (31 December 2018) at the prevailing exchange rate of GH¢1 = 10.5037 Rand. This gives a retranslated value of GH¢4,760,227 (50 million / 10.5037). An exchange loss of GH¢147,074 (GH¢4,907,301 – GH¢4,760,227) is recognized in profit or loss.
- Hedging the Receivable:
- Nyinahini has entered into forward rate agreements to hedge the final two payments, and these contracts are designated as fair value hedges of the recognized receivable. The forward contracts are recognized at their fair value of GH¢148,000 at the year-end, recorded as an asset. Since the hedge is classified as a fair value hedge, the gain of GH¢148,000 is credited to profit or loss to offset the exchange loss on the retranslated receivable.
Summary of Journal Entries:
- On 1 December 2018:
- Dr. Receivables: GH¢9,814,602
- Cr. Sales Revenue: GH¢9,814,602
- Dr. Deferred Income (advance payment): GH¢5,010,874
- Cr. Receivables: GH¢5,010,874
- Dr. Exchange Gain: GH¢103,573
- Cr. Profit or Loss: GH¢103,573
- At 31 December 2018:
- Dr. Exchange Loss: GH¢147,074
- Cr. Receivables: GH¢147,074
- Dr. Forward Contract Asset: GH¢148,000
- Cr. Profit or Loss: GH¢148,000
- Tags: Foreign Exchange Transactions, Forward Rate Agreements, Hedging, IAS 21, Receivables
- Level: Level 3
- Topic: Foreign currency
- Series: NOV 2019
- Uploader: Dotse