ACC702 International Corporate Reporting – Example [Hedge Accounting]

Melbourne Ltd manufactures electric cars. On 4 June 2011 Melbourne Ltd enters into
a non-cancellable purchase commitment with Miami Ltd for the supply of batteries,
with those batteries to be shipped on 30 June 2011. The total contract price was
US$3,000,000 and the full amount was due for payment on 30 August 2011.

Because of concerns about movements in foreign exchange rates, on 4 June 2011 Oz

Ltd entered into a forward rate contract on US dollar with a foreign exchange broker
so as to receive US$3,000,000 on 30 August 2011 at a forward rate of $A1.00 = US$0.78

We will assume that Melbourne Ltd prepares monthly financial statements and that
it elects to treat the hedge as a cash flow hedge. Further, we will assume that
Melbourne Ltd elect, pursuant to IAS39, to adjust the cost of the inventory as a result
of the hedging transaction.

Other information:
The respective spot rates, with the spot rates being the exchange rates for immediate
delivery of currencies to be exchanged, are provided below. The forward rates
offered on particular dates, for delivery of US dollar on 30 August 2011 are also
provided. It should be noted that on 30 August 2011, the last day of the forward rate
contract, the spot rate and the forward rate will be the same.

Date Spot rate Forward rates for 30 August

delivery of US$
4 June 2011 $A1.00 = US$0.80 $A1.00 = US$0.78
30 June 2011 $A1.00 = US$0.78 $A1.00 = US$0.76
31 July 2011 $A1.00 = US$0.75 $A1.00 = US$0.74
30 August 2011 $A1.00 = US$0.72 $A1.00 = US$0.72

Required:
Provide the journal entries to account for the hedged item and the hedging
instrument for the months ending 30 June, 31 July and 30 August 2011. No entry
is required on 4 June 2011 as fair value assessed of the forward rate agreement is
assessed as being zero.