Hedging with Forward Contracts—IFRS Journal Entries (Inventory Purchases)

On September 15 Polar Inc. ordered €125,000 in inventory from a supplier in Italy. The goods are scheduled to be delivered on October 15 and payment in full is due at that time. Polar immediately entered into a forward contract to purchase €125,000 on the scheduled delivery date. The inventory was received and payment made on October 15. Polar’s year end is September 30. Exchange rate information follows:

Date	Spot rate	Forward rate for delivery on October 15
September 15	€1 = C$1.4000	€1 = C$1.3925
September 30	€1 = C$1.3800	€1 = C$1.3775
October 15	€1 = C$1.3500	€1 = C$1.3500

Assume that Polar prepares its financial statements in accordance with IFRS and designates the forward contract as a cash flow hedge. Which of the following is the amount that will be recorded for the inventory?

This is the value of the forward contract on September 15 and is the amount ultimately paid to the bank on October 15 in exchange for €125,000. €125,000 × 1.3925 = $174,063

Quonset Ltd. (QL) delivers two deluxe huts to a customer in Mexico on June 1, Year 1, for MXN $78,000. The customer must pay QL within two months of delivery. The company decides to enter into a forward contract to sell MXN $78,000 to a bank on August 1, Year 1, and will receive Canadian dollars back, based on the forward rate established in the contract.

Which of the following statements best describes how the forward contract hedges the sale?

QL is subject to foreign exchange risk on the receivable from the customer, and the forward contract creates a payable that will offset foreign exchange gains or losses

On December 15, Year 1, BC Fish Corp., a Canadian public company, sold services to a company in Switzerland for SF100,000 on credit terms. The account receivable is due January 15, Year 2. On December 15, Year 1, BC Fish also entered into a forward contract to sell SF100,000 on January 15, Year 2. BC Fish’s year end is December 31. Relevant exchange rates are as follows:

Date	Spot rate	Forward rate for delivery on January 15, Year 2
December 15, Year 1	SF1 = C$0.7961	SF1 = C$0.7939
December 31, Year 1	SF1 = C$0.8050	SF1 = C$0.8000
January 15, Year 2	SF1 = C$0.7800	SF1 = C$0.7800

Assume that BC Fish elects to use hedge accounting to account for the hedge and designates the hedge as a fair value hedge.

Which of the following entries is required by BC Fish on December 15, Year 1, for the sale and the forward contract?

The forward contract is recorded at the forward rate on the initiation date (SF100,000 × C$0.7939)

Montreal Co. orders goods from a U.S. supplier on December 1, Year 1, for US$20,000. Those goods will be delivered to the entity on March 31, Year 2, and payment is due on that date. Also, on December 1, Year 1, Montreal hedges the purchase by entering into a forward exchange contract to purchase US$20,000 on March 31, Year 2.

Exchange rates over the relevant period are as follows:

Spot rates

December 1, Year 1	US$1 = C$0.90
December 31, Year 1	US$1 = C$0.92
March 31, Year 2	US$1 = C$0.93

Forward rates for March 31, Year 2, settlement

December 1, Year 1	US$1 = C$0.88
December 31, Year 1	US$1 = C$0.89

At what amount is the forward contract recorded at its initiation date using the gross method? Assume Montreal elects to use hedge accounting and accounts for this transaction as a cash flow hedge. Montreal reports under IFRS.

Regardless of whether hedge accounting is elected or the hedge type, the forward contract is initially recorded with offsetting payable to/receivable from bank accounts based on the forward rate on the initiation date. US$20,000 × $0.88 = $17,600

On November 3, Year 1, Sulling Inc. (SI) entered into a sales contract to sell €300,000 of goods to a customer. The goods are to be delivered on January 31, Year 2, and the customer payment is due on February 28, Year 2.

On November 3, Year 1, to hedge this foreign currency exposure, SI entered into a forward contract to sell €300,000 at a forward rate of 1€ = C$1.50 on February 28, Year 2.

SI has a December 31 year end, follows IFRS, applies hedge accounting, and has designated the forward contract as a cash flow hedge.

Relevant exchange rates are as follows:

Spot rates

November 3, Year 1	1€ = C$1.4500
December 31, Year 1	1€ = C$1.4900
January 31, Year 2	1€ = C$1.5300
February 28, Year 2	1€ = C$1.5200

Forward rates for delivery on February 28, Year 2

November 3, Year 1	1€ = C$1.5000
December 31, Year 1	1€ = C$1.5200
January 31, Year 2	1€ = C$1.5100

Which of the following is the correct journal entry to be recorded at December 31, Year 1, related to the forward contract?

The amount payable to bank is the variable side of the forward contract and is adjusted to the new forward rate at December 31 [€300,000 × ($1.5200 – $1.5000) = $6,000].

A	DR OCI 6,000     CR Payable to bank 6,000

On December 23, Year 1, Cable Corp., a Canadian company, ordered £80,000 in inventory from a supplier in the United Kingdom with payment due at the time of delivery. Cable immediately entered into a forward contract to purchase £80,000 on the scheduled delivery date of January 23, Year 2, to fix the cost of its inventory. The inventory was received on January 23 and the payment was made at that time. Cable reports under ASPE and has a year end of December 31.

Pertinent exchange rate information follows:

Date	Spot rate	Forward rate for delivery January 23, Year 2
December 23, Year 1	£1 = C$1.9600	£1 = C$1.9575
December 31, Year 1	£1 = C$1.9800	£1 = C$1.9580
January 23, Year 2	£1 = C$1.9400	£1 = C$1.9400

Assume that Cable meets the conditions to use hedge accounting. Which of the following statements regarding Cable’s journal entries pertaining to this transaction is true?

The inventory will be recorded for $156600 at the settlement date

The inventory will be recorded at the forward rate on the initiation date of the forward contract. £80,000 × $1.9575 = $156,600.

Grow Co. entered into a forward contract to decrease its foreign exchange risk related to a purchase of inventory from Japan. Which of the following statements best describes a rate used by Grow for its forward contract?

The spot rate is the rate for immediate purchase or delivery of the underlying asset