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 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 recognised 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)
View Solution
- IAS 21: The Effects of Changes in Foreign Exchange Rates governs the treatment of transactions in foreign currency. The invoice should be recorded as a sale and a receivable on 1 December 2018 at the spot exchange rate at the date, i.e. at GH¢9,814,602 (100m/10.1889).
- The amount paid in advance is initially recorded as deferred income at GH¢5,010,874 (50m/9.9783). On 1 December 2018 an exchange gain of GH¢103,573 (GH¢5,010,874 – GH¢4,907,301 (50m/10.1889)) is recognised in profit or loss when 50 million rand of the translated 100 million rand receivable is derecognised.
- The remaining 50 million rand receivable is retranslated at 31 December 2018 as GH¢4,760,227 (50m/10.5037) generating an exchange loss of GH¢147,074 (GH¢4,907,301 (50m/10.1889) – GH¢4,760,227).
- The two forward rate agreements are recognised at their fair value of GH¢148,000 (an asset as the rand has depreciated in value) in the statement of financial position.
- Given that they are fair value hedges the change in value of GH¢148,000 is a credit to profit or loss, eliminating the exchange loss recognised on the receivables.
Sale value on 1 December 2018 : 2 marks
Deferred income (amount received in advance) : 1 mark
Exchange gain on deferred income to profit or loss : 1 mark
Retranslation of receivable : 1 mark
Fair value hedge credited to P& L : 1 mark