Advanced Financial Accounting Guerrero/German/DeJesus/Ferrer/Laco/Valix

PAS 39: Foreign Currency Hedging

Part I: Theory of Accounts

1. PAS 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 of 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 transact and (2) 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 operations.
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 gin or loss on the changes in fair value of hedged items/(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 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 derivative designated as cash flow hedge shall be reclassified from
equity/cumulative OCI to profit or loss as reclassification adjustment in the same period during
which the hedged forecast cash flow 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 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 operation 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 statement 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
instrument/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 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

Part II: Problem Solving

1. On November 1, 2020, an entity acquired on account goods from a foreign supplier at a cost of $1,000.
The accounts payable are paid on January 30, 2021.

On December 1, 2020, 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 28, 2021.

The entity is operating in Philippine economy wherein the functional currency in the Philippine Peso.

Buying spot rate Selling spot rate

November 1, 2020 P40 P42
December 1, 2020 39 40
December 31, 2020 45 47

1. What is the sales revenue for 2020?

a. 58,500
b. 60,000
c. 67,500
d. 72,000
2. What is the carrying amount of accounts receivable on December 31, 2020?
a. 58,500
b. 60,000
 c. 67,500
d. 72,000
3. What is the carrying amount of accounts payable on December 31, 2020?
a. 40,000
b. 42,000
c. 45,000
d. 47,000
4. What is the foreign currency gain for 2020?
a. 4,000
b. 5,000
c. 3,000
d. 6,000

2. Vector Corporation issued a promissory note denominated in foreign currency for the purchase made
from a supplier in England on December 1, for a 60-say, 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 1FC to P74.85. On January 30,
the selling spot rate is 1FC to P75.75.

On the settlement date, how much is the foreign exchange gain/loss/

a. 172,422 gain
b. 100,116 loss
c. 172,422 loss
d. 98,658 loss

3. Uragon Company sold warehouse facilities for $8,340,000 to a customer in Oregon, USA on November
2, 2020. Collection in US dollars was due on January 31, 2021. On the same date, to hedge this foreign
currency exposure, Uragon Company entered into a forward contract to sell $8,340,000 to export bank
for delivery on January 31, 2021. Indirect exchange rates on different dates were as follows;

Nov. 2 Dec. 31 Jan. 31

Spot rate .02387 .02457 .02494

30-day futures .02364 .02475 .02437

60-day futures .02392 .02481 .02437

90-day futures .02463 .02403 .02304

1. How much is the effect on earnings due to hedged item in the December 31,2020 profit and
loss statement?
a. (10,008,000)
b. ( 5,838)
c. 10,008,000
d. 5,838
2. How much is the effect on earnings due to hedging instrument in the 2021 profit and loss
statement?
a. 2,502,000
b. 1,585
c. (2,502,000)
d. ( 1,585)
4. Barako Company acquired heavy equipment for $14,100 from a supplier in Detroit, USA on December
1, 2020. Payment in US dollars was due on March 31, 2021. 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, 2021. Direct exchange rates for dollars on different dates were as follows:
Spot Rates
Bid Offer

December 1, 2020 41.6 41.4

December 31, 2020 42.5 42.3

March 31, 2021 43.4 43.7

Forward Rates

Dec.1 Dec. 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

1. What is the reported value of the liability to he vendor at December 31, 2020?
a. 596,430
b. 599,250
c. 596,400
d. 599,200
2. What is the net impact in Barako Company’s income in 2020 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, 2020, P Corp entered into a firm commitment with Japanese firm to acquire
equipment, delivery and passage of title on March 31, 2021, 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 rate were as follows:
11/2/2020 12/31/2020 3/31/2021

Spot Rate P37 P38 P35

Forward Rate P40 P33 P35

1. What is the foreign currency gain/(loss) due to change in the fair value of the underlying
purchase commitment on December 31,2020?
a. 30,625 gain
b. 30,625 loss
c. 4,375 gain
 d. 4,375 loss
2. What is the amount debited to the equipment account?
a. 161,875 on 11/2/2020
b. 175,000 on 11/2/2020
c. 153,125 on 3/31/2021
d. 175,000 on 3/31/2021

6. On November 1, 2020, 7D Co. entered into a firm commitment with Toki-Toki Japanese Company 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, 2021. 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, 2020. 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 rate are provided:
November 1, 2020 December 31, 2020 January 30, 2021

Buying spot rate P10 P13 P12

Selling spot rate P13 P15 P16
Forward buying 90-days P11 P14
P15 Forward selling 90-days P13 P16
P17 Forward buying 60-days P14 P17
P16 Forward selling 60-days P15
P18 P14 Forward buying 30-days P11
P15 P12 Forward selling 30-days P13
P11 P14

1. What is the foreign currency gain/(loss) due to hedged item for the year ended December 31,
2020?
a. 40,000 gain
b. 20,000 loss
c. 30,000 gain
d. 10,000 loss
2. What is the foreign currency gain/(loss) due to h3edging instrument for the year ended
December 31,2021?
a. 50,000 loss
b. 30,000 gain
c. 20,000 gain
d. 20,000 loss
7. On October 1, 2020, the company took delivery from a Bahrain firm of inventory costing 850,000 dinar,
Payment is due on January 30, 2021. Concurrently the company paid P 11,700 to acquire an at-the-
money call option for 850,000 Bahrain Dinar. The strike price is P9.40.
Market Price Fair value of the call option

October 1, 2020 9.400 11,700

December 31, 2020 9.423 23,200
January 30,2021 9.435 29,750

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, 2020?
 a. 8,050
b. (8,050)
c. 19,550
d. (19,550)
2. If changes in the time value will be included in the assessment of hedge effectivenss, what is
the forex gain (loss) in the hedging instrument in 2021?
a. 5,250
b. 7,650
c. (4,300)
d. 6,550
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, 2021?
a. 10,200
b. 5,100
c. 12,750
d. (7,500)

8. On October 1, 2020, 5J Inc. sold on account an inventory to a US-based company at a price of $5,000
collectible on January 30, 2021. On November 1, 2020, 5J purchased on account an inventory to a US-
based company at a price of $8,000 payable on March 2, 2021.

On October 1, 2020, in order to hedge the foreign currency risk related to its foreign currency
denominated account receivables, 5J acquired a 120-day put option from RCBC to sell $5,000 at a
strike price of P40 by paying option premium of P500. On November 1, 2020, in order to hedge the
foreign currency risk related to its foreign currency denominated accounts 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:
10/1/2020 11/1/2020 12/31/2020 1/30/2021 3/2/2021
Buying spot rate P40 P38 P36 P37 P39

Selling spot rate P39 P41 P44 P41 P42

Fair value of put option ? ? P23,000 ? ?
Fair value of call option ? ? P25,000 ? ?
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, 2020?
a. 2,900 net gain
b. 44,000 net gain
c. 46,900 net gain
d. 44,000 net loss
2. What is the foreign currency gain or loss as a result of hedging activity to be reported by 5J
Inc. for the year end December 31, 2021?
a. 4,000 net loss
b. 21,000 net loss
c. 25,000 net loss
d. 21,000 net gain
9. On September 1, 2020, 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, 2021. On October 1, 2020, 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, 2021?
On September 1, 2020,, 2B Co. purchased a 150-day call option to buy $1,000 at an option price of
P20 by paying option premium of P200. On October 1, 2020, 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.

The forecasted purchase and sale transaction occurred on the date anticipated. For the year ended
December 31, 2021, all foreign currency receivables are collected but only 80% of purchased
inventories from the foreign vendor were sold to third person.
The following additional data are provided:
9/1/2020 10/1/2020 12/31/2020 1/30/2021 3/31/2021
Buying spot rate P23 P24 P21 P22.50 P22
Selling spot rate P20 P21 P24 P23 P21
Fair value of put option ? ? P10,000 ? ?
Fair value of call option ? ? P4,500 ? ?
1. What is the net foreign currency gain or loss in the Other Comprehensive Income of
Statement of Comprehensive Income for the year ended December 31, 2020?
a. 13,000 net gain
b. 1,000 net gain
c. 14,000 net gain
d. 2,800 net gain
2. What is the net foreign currency gain or loss in Other Comprehensive Income of Statement
of Comprehensive Income for the year ended December 31, 2021?
a. 4,000 net loss
b. 1,500 net loss
c. 5,500 net loss
d. 5,700 net loss
3. What is the net cumulative Other Comprehensive Income in December 31, 2021?
a. 600 cumulative credit
b. 6,600 cumulative credit
c. 2,400 cumulative credit
d. 9,000 cumulative credit