Accounting for Foreign Exchange Forward Contracts

The basic concept of a forex futures contract is that its value must move in the opposite direction to the value of the expected receipt from the client. In the case of a company that receives payments in a foreign currency, the currency futures contract should be an agreement under which the company agrees to sell the foreign currency for a fixed amount of its own currency. Note that the futures contract has a fair value of zero at the time of contraction of a futures contract, because there is no difference in forward rate between this contract and other contracts concluded at the same time. CSA Topic 815, “Derivatives and Hedging,” requires companies to value foreign currency futures at their fair value resulting from the discounting of the difference between the contract price and the current forward rate at the settlement date. The total result of the futures contract consists of two components. A liability is recognized for futures contracts with a decrease in fair value. Gains or losses resulting from changes in the fair value of a futures contract are recognised either in net income or in other accrued comprehensive income (AOCI) in the Equities section. The change in the fair value of a currency futures contract, called cash flow hedging with hedging based on changes in forward prices, is currently recognised in other comprehensive income. An amount that offsets the associated foreign exchange gain or loss is reclassified from other comprehensive income to comprehensive income and presented in the same line of the income statement as the foreign exchange gain or loss on the underlying asset or liability. Depreciation and amortization for the period of the initial premium or discount on the foreign currency futures contract is broken down into other comprehensive income and comprehensive income and is presented in the same line of the income statement as the foreign exchange gain or loss on the underlying asset or liability. The net profit effect is the depreciation of the initial premium or discount on the currency futures contract during the period. The calculation of the number of tee or reward points to be deducted or added from a futures contract is based on the following formula: The recognition of profit or loss depends on the type of futures contract. If the futures contract is used for speculative purposes, include the result in the net profit.

If the futures contract is used for fair value hedging, the result must also be recorded in net income. When the term is used to hedge cash flows, you account for gains or losses in aOCI. The following example shows how to account for the purchase of stocks denominated in euros (€), uses an annual discount rate of 6%, and amortizes the futures contract premium on a straight-line basis. Newspaper publications illustrate the basic accounting of a foreign currency futures contract, which is called the hedging of a foreign currency liability. In balance sheet 133, the recognition of derivatives designated as net hedging transactions has been changed. Since Statement 133 requires that all derivatives be reported at fair value, the discount or premium of a futures contract used to hedge the foreign exchange risk of the entity`s net investments in foreign transactions cannot be accounted for separately. These guidelines are set out in Statement 133 Implementation Number H6, “Accounting for Premiums or Discounts on a Futures Contract Used as a Hedging Instrument in a Net Investment Hedge”. Topic 830 of the Consolidation of Accounting Standards (ASC), “Foreign Currency Issues,” requires corporations to value foreign currency assets and liabilities at their dollar equivalent using the current spot rate. Foreign exchange risk is the change in the dollar value of exposed assets or liabilities resulting from changes in the spot rate over a given period; these gains and losses are recognised and recognised in profit or loss. A futures contract is a type of derivative financial instrument that takes place between two parties. The first party agrees to buy an asset of the second at a certain future time at an immediately indicated price. These types of contracts, unlike futures, are not traded through exchanges; they take place without an order between two private parties.

The mechanics of a futures contract are quite simple, which is why these types of derivatives are popular as hedges against risks and as speculative opportunities. Knowing how to account for futures requires a basic understanding of the underlying mechanics and a few simple journal entries. The journal entries for the fair value coverage and cash flow coverage designations are shown in Figure 2. As of May 1, 2017, the Company records the purchase and related figure at $108,990 using the current cash rate. The futures contract does not require an initial deposit, so no accounting is required on May 1, 2017. .