Financial Instruments – Hedge – IndAS 109 (Cash Flow Hedge & Fair Value Hedge) by CA. Jai Chawla financial instrument

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39:35 – Cash Flow Hedge

Hi sir very good morning,

In embedded derivative (Financial instruments): Illustration number 6 page 12.139 ICAI module,

We ( ABG private limited ) are importer of solar machine and we booked a forward $ buy conteact @ Rs. 65/$.

Payment due is : $ 50 million.

And if on maturity, $ reaches to Rs. 66/$.

Are we at gain or loss?

In my opinion, we are at gain because we locked the buying rate @ 65 rs./$.
And it has increased to we saved Rs. 1.

But in financial instruments, Ind as 109, they are writing we are at loss of rs. 1 /$. So total loss Rs. 50 million ( $50 million * rs.1/$ = rs. 50 million )

1.They first make a host purchase contract for buying $ and they it is denominated in functional currency i.e. Rupee.
($50 million * 65= rs. 3250 million).
Amount in functional currency is rs. 3250 million

2. They determined this amount of Rs. 3250 million using relevent forward exchange rate i.e. Rs. 65/$.

3. The embedded derivative is a forward currency contract to sell the applicable amount ($ 50 million) of the contract currency ($) for the functional currency (rupee), at the same forward exchange rate. Total comes same rupee 3250 million.

Therefore, the effect is that the fair value of the embedded derivative is intiallly 00.

4. Subsequent changes in the fair value of embedded derivative are recorded in profit and loss.

5. On delivery of the non-financial item (solar panel) the host contract is fulfilled and the embedded derivative is effectively settled.

A foreign currency creditor is recognised for the contract amount ($ tp million ), translated at the spot rate (Rs.66/$).

The closing carrying amount of embedded derivative ($ 50million *rs 1/$ = Rs. 5 crore ) is added to the functional currency amount (325 crores )

So total 325 crore +5 crore = 330 crores.