Question Tag: Forward Rate Agreements

a) Nyinahini Ltd (Nyinahini) is a company reporting under IFRS. Nyinahini normally operates only within the country where its buildings are physically located. Recently, it entered into a contract to supply its products to a new client based in South Africa. All the work was completed in the period October to November 2018. The (fixed) contract price of 100 million Rand has been agreed upon as denominated in South African Rand. The full amount was invoiced on 1 December 2018 when the exchange rate was GH¢1 = 10.1889 Rand. The new client paid 50 million Rand in advance on 1 November 2018 when the exchange rate was GH¢1 = 9.9783 Rand. The balance will be paid in two equal instalments on 31 March 2019 and 30 June 2019. The exchange rate at 31 December 2018 was GH¢1 = 10.5037 Rand.

Nyinahini decided to eliminate exchange rate differences on the final two payments and entered into two forward rate agreements on 1 December 2018 to sell the appropriate amount of Rand on 31 March 2019 and 30 June 2019, and set up the relevant documentation to treat them as fair value hedges of the recognized receivables. At 31 December 2018, the two contracts for settlement on 31 March 2019 and 30 June 2019 were valued at GH¢148,000 collectively, as an asset from Nyinahini’s point of view.

Required:
Set out and discuss the accounting treatment of the above items, including relevant calculations, as the information provided permits, in the financial statements of Nyinahini for the year ended 31 December 2018.

(6 marks)