Classification of exchange gains or losses - Examples
On 1 June 200X a company sells forward USD 1000 against EUR 800. The guaranteed exchange rate at maturity is 1 EUR = USD 1.25.
On 30 June 200X the end-of-month spot rate is EUR 1 = USD 1.60. At the June closing USD 1000 is worth only EUR 625. There is a potential gain of EUR 175 (EUR 800 – EUR 625), which is recorded directly through equity (no impact on the income statement as it is reported in OCI) because this transaction qualifies as a hedge (the hedge is assumed to be 100% effective in the example and the required documentation is supposed to be available).
At maturity the spot rate is EUR 1 = USD 1.55. At maturity USD 1000 is worth EUR 645.16 on the spot market. The company delivers USD 1000 in cash against EUR 800 in cash (exchange rate of the forward sale). If the company had not sold USD 1000 forward, it could have sold them spot against EUR 645.16. The difference between 800 and 645.16 is an "exchange gain on a hedge transaction".
Exchange results on a "hedge" transaction Exchange gain or loss on a "hedge" transaction | ||
Assumptions | ||
The company has sold a forward on 31/m | 1000 | USD |
against | 800 | EUR |
This contract is considered as a hedge (cash flow hedge) |
|
|
Rate at maturity 31/m+2 | 1.55 |
|
Before maturity | |||
|---|---|---|---|
Debit or loss > 0; Credit or gain < 0 | |||
Month-end rate at 31/m+1
| 1 EUR | 1.6 USD | Revaluation in EUR |
Balance sheet at 31/m+1 |
|
|
|
Currency to be received | 800 |
| 800 |
Currency to be delivered |
| -1000 | -625 |
Total comprehensive income |
|
| -175 |
Income statement at 31/m+1 |
|
|
|
Exchange gain or loss on a hedge transaction |
|
| 0 |
Net result |
|
| 0 |
Other comprehensive income |
|
| -175 |
Total comprehensive income |
|
| -175 |
| At maturity | |||
|---|---|---|---|
Debit or loss > 0; Credit or gain < 0 | |||
Month-end rate at 31/m+2 | 1 EUR | 1.55 USD | Revaluation in EUR |
Balance sheet at 31/m+2 |
|
|
|
Currency to be received | 0 |
| 0 |
Currency to be delivered |
| 0 | 0 |
Cash | 800 | -1000 | 154,84 |
Total comprehensive income |
|
| -154,84 |
Income statement at 31/m+2 |
|
|
|
Exchange gain or loss on a hedge transaction (recycling from OCI) |
|
| -154,84 |
Net result |
|
| -154,84 |
Recycling from OCI to income statement |
|
| -154,84 |
Other comprehensive income |
|
| -154,84 |
Total comprehensive income |
|
| -154,84 |
The example below is similar to the previous example except that the transaction is considered as a trade transaction” (e.g. the company does not wish to prepare the documentation required for a hedge transaction or there is no underlying, which could be assimilated as a pure speculation).
On 1 June 200X a company sells forward USD 1000 against EUR 800. The guaranteed exchange rate at maturity is 1 EUR = USD 1.25.
On 30 June 200X the end-of-month spot rate is EUR 1 = USD 1.60. At the June closing USD 1000 is worth only EUR 625 on the spot market. A gain of EUR 175 (EUR 800 – EUR 625) is recorded in the income statement under "currency conversion and exchange rate differences - Trade" because this transaction does not qualify as a hedge.
At maturity the spot rate is EUR 1 = USD 1.55. At maturity USD 1000 is worth EUR 645.16 on the spot market. The company delivers USD 1000 in cash against EUR 800 in cash (exchange rate of the forward sale). If the company had not sold USD 1000 forward, it could have sold them spot against EUR 645.16.
The difference between EUR 625 (end of June) and EUR 645.16 (at maturity) is a loss of EUR 20.16 is recorded under "currency conversion and exchange rate differences - Trade". The cumulative gain is EUR 175 – EUR 20.16 = EUR 154.84.
Currency conversion and exchange rate differences - Trade | ||
Assumptions | ||
The company has sold a forward on 31/m | 1000 | USD |
against | 800 | EUR |
This contract is considered as a trade |
|
|
Rate at maturity 31/m+2 | 1.55 |
|
Before maturity | |||
|---|---|---|---|
Debit or loss > 0; Credit or gain < 0 |
|
|
|
Month-end rate at 31/m+1 | 1 EUR | 1.6 USD | Revaluation in EUR |
Balance sheet at 31/m+1 |
|
|
|
Currency to be received | 800 |
| 800 |
Currency to be delivered |
| -1000 | -625 |
Total comprehensive income |
|
| 0 |
Income statement at 31/m+1 |
|
|
|
Currency conversion and exchange rate differences - Trade |
|
| -175 |
Net result |
|
| -175 |
Other comprehensive income |
|
| 0 |
Total comprehensive income |
|
| 0 |
At maturity | |||
|---|---|---|---|
Debit or loss > 0; Credit or gain < 0 |
|
|
|
Month-end rate at 31/m+2 | 1 EUR | 1.55 USD | Revaluation in EUR |
Balance sheet at 31/m+2 |
|
|
|
Currency to be received | 0 |
| 0 |
Currency to be delivered |
| 0 | 0 |
Cash | 800 | -1000 | 154,84 |
Total comprehensive income |
|
| -154,84 |
Income statement at 31/m+2 |
|
|
|
Exchange gain or loss on a hedge transaction (recycling from OCI) |
|
| -154,84 |
Net result |
|
| -154,84 |
Recycling from OCI to income statement |
|
| 0 |
Other comprehensive income |
|
| 0 |
Total comprehensive income |
|
| -154,84 |
Assignment of receivables to CICC | ||
Amount invoiced in USD |
| 100.000 |
| Exchange rate at the invoice date | 1.5 | |
| Rate guaranteed by CICC | 1.48 | |
| EUR | |
Net sales | 66.667 | |
| Exchange gains or losses on assignments to CICC | -901 | |
| Trade receivables | 67.568 | |
| 0 | |
The difference between the exchange rate at the invoice date and the exchange rate guaranteed by CICC is due to three reasons:
Month-end rate | 1 EUR | 1.5 USD | Revalued accounts |
Equity | -1000 |
| -1000 |
Trade receivables | 500 |
| 500 |
Cash | 100 | 300 | 300 |
Currency conversion and exchange rate differences - Other |
|
| 200 |
Balance | -400 | 300 | 0 |