At 31 July 2010 this instrument meets the definition of a derivative:
- Small or no initial investment.
- Its value is dependent on an underlying economic item; exchange rate.
- Its settlement will take place at some future date.
As a imitative it should be accounted for as an "asset or liability held at fair value throughout profit or loss". The value of the imitative instrument will be the difference between the values of the contract when settled evaluated with the cost of B$2m being purchased at the spot rate at the year-end date.
Cost of B$2m at a contracted rate of B$0.64 = A$3,125,000
Cost of B$2m at the forward rate of B$0.70 = A$2,857,143
The imitative results in a liability at the year-end date of A$267,857 (A$3,125,000 - A$2,857,143) as the contract has inauspicious terms when compared to the spot rate. The loss on imitative would be charged to the income statement in the year to 31 August 2010.
Recorded as:
Dr Income statement (loss on derivative) A$267,857
Cr Liabilities - derivatives A$267,857
(b) (i)
If the imitative was designated as a prevarication tool in a cash flow hedge then the loss of A$267,857 would be recognised in other complete income until the related cash flow (hedged item) occurred, and shown as a loss in other complete income in the year ended 31 August 2010. This ensures that the movements in the hedge item and the hedging item can be offset in the same accounting period.
|
(ii) Statement of total comprehensive income for the year ended 31 August 2010
|
A$
|
|
Profit for the year
|
1,000,000
|
|
Other comprehensive income:
|
|
Loss on hedging item
|
(267,857)
|
|
Total comprehensive income
|
732,143
|