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CHAPTER 4: FOREIGN CURRENCY HEDGING (IAS 39)

Part 1: Theory of Accounts

1. IAS 39 enumerated the following three types of hedging relationships, except
a. Fair value hedge: a hedge of the exposure to changes in fair value of a recognized asset (AFS Securities) or liability or an
unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular
risk and could affect profit or loss.
b. Cash flow hedge: a hedge of the exposure to variability in cash flows that (1) is attributable to a particular risk associated with a
recognized asset or liability (such as all or some future interest payments on variable rate debt) or (2) a highly probable forecast
transaction and (3) could affect profit or loss.
c. Hedge of a net investment in foreign operation which is the hedge of the amount of the reporting entity’s interest in the net assets of
the operation.
d. Undesignated hedge such as hedge of foreign currency denominated payable or receivable.

2. In case of hedging transaction designated as fair value hedge, which of the following statements is correct?
a. The gain or loss from remeasuring the hedging instrument/derivative designated as fair value hedge shall be recognized in profit or
loss.
b. The gain or loss on the changes in fair value of hedged item/AFS securities attributable to the hedged risk shall adjust the carrying
amount of the hedged item and be recognized in profit or loss.
c. Both A and B
d. Neither A nor B.

3. In case of hedging transaction designated as cash flow hedge, which of the following statements is correct?
a. The portion of the gain or loss on the hedging instrument/derivative designated as cash flow hedge that is determined to be an
effective hedge or the change in intrinsic value of the derivative designated as cash flow hedge shall be recognized in other
comprehensive income.
b. The ineffective portion of the gain or loss on the hedging instrument/derivative designated as cash flow hedge or the change in time
value of the derivative designated as cash flow hedge shall be recognized in profit or loss.
c. The cumulative other comprehensive income recognized in equity arising from cumulative changes in intrinsic value of derivatives
designated as cash flow hedge shall be reclassified from equity/cumulative OCI to profit or loss as a reclassification adjustment in the
same period during which the hedged forecast cash flows affects profit or loss.
d. All of the above.

4. In case of hedging transaction designated as hedge of net investment in a foreign operation, which of the following statements is correct?
a. The portion of the gain or loss on the hedging instrument/derivative designated as hedge of net investment in foreign operation that is
determined to be an effective hedge shall be recognized in other comprehensive income.
b. The ineffective portion of the gain or loss on the hedging instrument/derivative designated as hedge of net investment in foreign shall
be recognized in profit or loss.
c. Both A and B
d. Neither A nor B

5. In case of hedging transaction considered as “undesignated hedge” such as hedge of foreign currency denominated accounts payable or
foreign currency denominated accounts receivable, which of the following statements is correct?
a. The exchange differences arising from the changes in measurement of hedged item or foreign currency denominated accounts
payable/receivable shall be recognized in profit or loss.
b. The exchange differences arising from the changes in measurement of hedging instruments/derivatives shall be recognized in profit or
loss.
c. Both A and B
d. Neither A nor B

6. How shall an entity account for hedging transaction classified as hedge of firm commitment?
a. Cash flow hedge only
b. Fair value hedge only
c. Undesignated hedge only
d. IAS 39 gives the entity the option to elect either cash flow hedge or fair value hedge for hedge of firm commitment

7. It refers to the degree to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by
changes in the fair value or cash flows of the hedging instrument.
a. Hedge effectiveness
b. Hedge ineffectiveness
c. Hedge imperfectness
d. Hedge inappropriateness
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Part II. Problem Solving

1. On November 1, 2018, an entity acquired on account goods from a foreign supplier at a cost of $ 1,000. The accounts payable are paid on
January 30, 2019.

On December 1, 2018, an entity sold on account the said goods to a foreign customer at a selling price of $ 1,500. The accounts receivable are
collected on February 29, 2019.
The entity is operating in Philippine economy wherein the functional currency is the Philippine Peso. The following direct exchange rates are
provided:
Buying spot rate Selling spot rate
November 1, 2018 P 40 P 42
December 1, 2018 39 40
December 31, 2018 45 47

1.1. What is the sales revenue for 2018?

a. 58,500
b. 60,000
c. 67,500
d. 72,000

1.2. What is the carrying amount of accounts receivable on December 31, 2018?
a. 58,500
b. 60,000
c. 67,500
d. 72,000

1.3. What is the carrying amount of accounts payable on December 31, 2018?
a. 40,000
b. 42,000
c. 45,000
d. 47,000

1.4. What is the net foreign currency gain for 2018?

a. 4,000
b. 5,000
c. 3,000
d. 6,000

2. Vector Corp. issued a promissory note denominated in foreign currency for the purchase made from a supplier in England on December 1, for
60-day, 18% promissory note for 108,000 pounds, at a selling rate of 1 FC to P74.20. On December 31, the selling spot rate is 1 FC to P74.85.
On January 30, the selling spot rate is 1 FC to P75.75. On the settlement date, how much is the foreign exchange gain or loss?
a. 172,422 gain
b. 100,116 loss
c. 172,422 loss
d. 98,658 loss

3. Uragon Co. sold warehouse facilities for $ 8,340,000 to a customer in Oregon, USA on November 2, 2018. Collection in US dollars was due on
January 31, 2019. On the same date, to hedge this foreign currency exposure, Uragon Co. entered into a forward contract to sell $ 8,340,000 to
Export Bank for delivery on January 31, 2019. Indirect exchange rates on different dates were as follows:
November 2 December 31 January 31
Spot rate 0.02387 0.02457 0.02494
30-day futures 0.02364 0.02475 0.02278
60-day futures 0.02392 0.02481 0.02437
90-day futures 0.02463 0.02403 0.02304

3.1. How much is the effect on earnings due to hedged item in the December 31, 2018 profit and loss statement?
a. (10,008,000)
b. (5,838)
c. 10,008,000
d. 5,838

3.2. How much is the effect on earnings due to hedging instrument in the 2019 profit and loss statement?
a. 2,502,000
b. 1,585
c. (2,502,000)
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d. (1,585)

4. Barako Co. acquired heavy equipment for $ 14,100 from a supplier in Detroit, USA on December 1, 2018. Payment in US dollars was due on
March 31, 2019. On the same date, to hedge this foreign currency exposure, Barako entered into a forward contract to purchase $ 14,100 from
Citibank for delivery on March 31, 2019. Direct exchange rates for dollars on different dates were as follows:
Bid spot rate Offer spot rate
December 1, 2018 41.6 41.4
December 31, 2018 42.5 42.3
March 31, 2019 43.4 43.7

Forward Rates
December 1 December 31 March 31
30-day futures 42.3 41.8 43.2
60-day futures 41.8 42.2 42.6
90-day futures 40.6 42.5 43.4
120-day futures 42.2 42.8 42.9

4.1. What is the reported value of the liability to the vendor at December 31, 2018?
a. 596,430
b. 599,250
c. 596,400
d. 599,200

4.2. What is the net impact in Barako Co.’s income in 2018 as a result of this hedging activity?
a. 8,460 net gain
b. 8,460 net loss
c. 8,500 net gain
d. 8,500 net loss
5. On November 2, 2018, P Corp. entered into a firm commitment with Japanese firm to acquire equipment, delivery and passage of title on March
31, 2019, at a price of 4,375 yen. On the same date, to hedge against unfavorable changes in the exchange rate of the yen, P Corp. entered
into a 150 day forward contract with BPI for 4,375 yen. The relevant exchange rates were as follows:
11/2/2018 12/31/2018 3/31/2019
Spot rate P 37 P 38 P 35
Forward rate P 40 P 33 P 35

5.1. What is the foreign currency gain/loss due to the change in the fair value of the underlying purchase commitment on December 31,
2018?
a. 30,625 gain
b. 30,625 loss
c. 4,375 gain
d. 4,375 loss

5.2. What is the amount debited to the equipment account?

a. 161,875 on 11/2/2018
b. 175,000 on 11/2/2018
c. 153,125 on 3/31/2019
d. 175,000 on 3/31/2019

6. On November 1, 2018, 7D Co. entered into a firm commitment with Toki-toki Japanese Co. for the export of dried mangoes with a contract price
of 10,000 yen. The goods will be delivered by 7D Co. on January 30, 2019. On the same day, in order to protect itself from the risk of changes
in fair value of the firm commitment due to changes in underlying foreign currency, 7D Co. entered into a forward contract with BDO for the sale
of 10,000 yen at the forward rate on November 1, 2018. IAS 39 provides that hedge of the foreign currency risk of a firm commitment may be
accounted for as either fair value hedge or cash flow hedge. 7D Co. elected to account for the hedge of the firm commitment using fair value
hedge. The following direct exchange rates are provided:
Nov. 1, 2018 Dec. 31, 2018 Jan. 30, 2019
Buying spot rate P10 P13 P12
Selling spot rate 13 15 16
Forward buying 90-days 11 14 15
Forward selling 90-days 13 16 17
Forward buying 60-days 14 17 16
Forward selling 60-days 15 18 14
Forward buying 30-days 11 15 12
Forward selling 30-days 13 11 14

6.1. What is the foreign currency gain/loss due to hedged item for the year ended December 31, 2018?
a. 40,000 gain
b. 20,000 loss
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c. 30,000 gain
d. 10,000 loss

6.2. What is the foreign currency gain/loss due to hedging instrument for the year ended December 31, 2019?
a. 50,000 loss
b. 30,000 gain
c. 20,000 gain
d. 20,000 loss

7. On October 1, 2018, the company took delivery from a Bahrain firm of inventory costing 850,000 dinar. Payment is due on January 30, 2019.
Concurrently the company paid P 11,700 to acquire an at-the-money call option for 850,000 Bahrain dinar. The strike price is P 9.40.
Market price Fair value of the call option
October 1, 2018 9.400 11,700
December 31, 2018 9.423 23,200
January 30, 2019 9.435 29,750

7.1. If changes in the time value will be excluded from the assessment of hedge effectiveness, what is the forex gain (loss) on the
hedging instrument due to change in the ineffective portion on December 31, 2018?
a. 8,050
b. (8,050)
c. 19,550
d. (19,550)

7.2. If changes in the time value will be included in the assessment of hedge effectiveness, what is the forex gain (loss) in the hedging
instrument I 2019?
a. 5,250
b. 7,650
c. (4,300)
d. 6,550

7.3. If split accounting is used in the assessment of hedge effectiveness, what is the forex gain (loss) on the option contract due to
change in intrinsic value on December 31, 2019?
a. 10,200
b. 5,100
c. 12,750
d. (7,5000

8. On October 1, 2018, 5J Inc. sold on account an inventory to a US-based company at a price of $5,000 collectible on January 30, 2019. On
November 1, 2018, 5J purchased on account an inventory to a US-based company at a price of $8,000 payable on March 2, 2019.

On October 1, 2018, in order to hedge the foreign currency risk related to its foreign currency denominated account receivable, 5J acquired a
120-day put option from RCDC to sell $5,000 at a strike price of P40 by paying option premium of P500. On November 1, 2018, in order to
hedge the foreign currency risk related to its foreign currency denominated account payable, 5J acquired a 120-day call option from RCBC to
buy $8,000 at an option price of P41 by paying option premium of P600.

The following additional data are provided:

10/1/ 11/1/ 12/31/ 1/30/ 3/2/
2018 2018 2018 2019 2019
Buying spot rate P40 P38 P36 P37 P39
Selling spot rate 39 41 44 41 42
Fair value of put option ? ? P 23,000 ? ?
Fair value of call option ? ? 25,000 ? ?

8.1. What is the net foreign currency gain or loss as a result of hedging activity to be reported by 5J Inc. for the year end December 31,
2018?
8.2. What is the net foreign currency gain or loss as a result of hedging activity to be reported by 5J for the year end December 31,
2019?

9. On September 1, 2018, 2B Co. anticipated the purchase of merchandise from a foreign vendor at a price of $1,000. The purchase would
probably occur on January 30, 2019. On October 1, 2018, 2B Co. forecasted the sale of merchandise to a foreign customer at a price of $3,000.
The sale would probably occur on March 31, 2019.

On September 1, 2018, 2B Co. purchased a 150-day call option to buy $1,000 at an option price of P20 by paying option premium of P 200. On
October 1, 2018, 2B Co. purchased a 180-day put option to sell $3,000 at a strike price of P24 by paying option premium of P300. The
company prepares calendar year financial statements.
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The forecasted purchase and sales transaction occurred on the date anticipated. For the year ended December 31, 2019, all foreign currency
receivable are collected but only 80% of purchased. The following additional data are provided:
9/1/ 10/1/ 12/31/ 1/30/ 3/31/
2018 2018 2018 2019 2019
Buying spot rate P 23 P24 P21 P22.50 P22
Selling spot rate 20 21 24 23 21
Fair value of put option ? ? P 10,000 ? ?
Fair value of call option ? ? P 4,500 ? ?

9.1. What is the net foreign currency gain or loss in Other Comprehensive Income of Statement of Comprehensive Income for the year
ended December 31, 2018?
a. 13,000 net gain
b. 1,000 net gain
c. 14,000 net gain
d. 2,800 net gain

9.2. What is the net foreign currency gain or loss in Other Comprehensive Income Statement Income for the year ended December 31,
2019?
a. 4,000 net loss
b. 1,500 net loss
c. 5,500 net loss
d. 5,700 net loss

9.3. What is the net cumulative Other Comprehensive Income in December 31, 2019?
a. 600 cumulative credit
b. 6,600 cumulative credit
c. 2,400 cumulative credit
d. 9,000 cumulative credit

END