CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

Advanced Financial Accounting GERMAN/LIM/VALIX/K. DELA CRUZ/MARASIGAN

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 or 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 transaction 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 operation.
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 gain or loss on the changes in fair value of hedged item/(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 the 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 of derivatives designated as cash flow hedge shall be reclassified
from equity/cumulative OCI to profit or loss as a reclassification adjustment in the same period
during which the hedged forecast cash flows 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 the 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 shall be recognized in profit or loss.
c. Both A and B.
d. Neither A nor B

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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 statements 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
instruments/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 cash flow 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

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Part II: Problem Solving

1. The Philippine corporation purchased merchandise from a US firm for USD$15,000 on November
1, 2021. Also on the same date the Philippine corporation sold merchandise to a US firm for
USD$30,000.
The following rates were available:
Buying Rate Selling Rate
November 1, 2021 US$1 = P46.00 P1 = $.021505
December 31, 2021 US$1 = P45.80 P1 = $.021277
January 31, 2022 (settlement date) US$1 = P46.20 P1 = $.022222

1. What is the amount of sales revenue recognized for the year 2021?
a. 1,380,000
b. 1,395,000
c. 1,374,000
d. 1,410,000

2. What is the carrying amount of the accounts receivable on December 31, 2021?
a. 1,410,000
b. 1,374,000
c. 1,386,000
d. 1,350,000

3. What is the carrying amount of the accounts payable on December 31, 2021?
a. 687,000
b. 705,000
c. 693,000
d. 675,000

4. What is the net foreign currency gain/(loss) for the year 2021?
a. 12,000 gain
b. 12,000 loss
c. 13,500 gain
d. 13,500 loss

2. On Mar 1, 2021, a Philippine company sells merchandise to a foreign customer in Singapore dollar
for SG$12,000. On the same date, the Philippine company received a 60-day 12% note receivable
from the foreign customer. On April 30, 2021, the Philippine company collected the total proceeds
from the foreign customer.
Buying Rate Selling Rate
March 1, 2021 P1 = SG$.029411 SG$1 = P35.47
March 31, 2021 P1 = SG$.028901 SG$1 = P36.10
April 30, 2021 P1 = SG$.028571 SG$1 = P36.07

1. What is the forex gain or loss on March 31, 2021?

a. 7,200 gain
b. 7,200 loss
c. 7,272 gain
d. 7,272 loss

2. What is the forex gain or loss on the settlement date?

a. 4,800 gain
b. 4,800 loss
c. 4,848 gain
d. 4,848 loss
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3. Anton Corp. is engaged in a retail business. The company buys its merchandise from foreign
suppliers and ships its goods overseas to target customers outside their country.

On September 1, 2021 an overseas customer called up and placed an order for certain merchandise
worth $95,000 and on the same date, the company also ordered additional merchandise from its
foreign supplier worth $55,000.

On September 30, 2021, the invoice is billed to the customer and due on December 31, 2021. The
merchandise from foreign supplier was shipped on October 31, 2021 and was due on November
30, 2021.

To hedge in the possible fluctuations in the exchange rate, the entity entered into a forward contract
to sell $95,000 on September 30, 2021 for delivery on December 31, 2021 and also entered into a
forward contract to buy $55,000 on October 31, 2021 for delivery on November 30, 2021. The
relevant exchange rates were as follows:

Date 09/01/21 09/30/21 10/31/21 11/30/21 12/31/21

Selling spot rate 34.55 34.40 36.34 36.50 32.88
Buying spot rate 35.33 35.67 35.45 35.23 34.50
90-day forward rate 36.23 35.12 35.22 36.43 35.90
60-day forward rate 34.78 34.89 36.76 35.68 35.97
30-day forward rate 36.78 38.55 35.43 36.53 37.77

1. What is the amount of sales revenue recognized for the year 2021?
a. 3,356,350
b. 3,268,000
c. 3,388,650
d. 3,282,250

2. What is the forex gain or loss due to hedging instrument pertaining to the export
transaction for the month of November 30, 2021?
a. 21,850 loss
b. 21,850 gain
c. 133,950 loss
d. 133,950 gain

3. What is the net forex gain or loss for the year 2021 due to the hedging activity?
a. 2,200 net loss
b. 2,200 net gain
c. 37,150 net loss
d. 37,150 net gain

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4. On November 2, 2021, P Corp entered into a firm commitment with Japanese firm to acquire
equipment, delivery and passage of title on March 31, 2022, 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 rates were as follows:
11/2/2021 12/31/2021 3/31/2022
Spot Rate P37 P38 P35
Forward Rate P40 P33 P35

1. What is the foreign currency gain/(loss) due to the change in the fair value of the
underlying purchase commitment on December 31, 2021?
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 11/2/2021
b. 175,000 on 11/2/2021
c. 153,125 on 3/31/2022
d. 175,000 on 3/31/2022

5. On November 1, 2021, 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, 2022. 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, 2021. 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 rates are
provided:

November 1, 2021 December 31, 2021 January 31, 2022

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, 2021?
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 hedging instrument for the year ended
December 31, 2022?
a. 50,000 loss
b. 30,000 gain
c. 20,000 gain
d. 20,000 loss
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6. On November 1, 2021, Hublot Co. acquired and took delivery from an Australian manufacturer of
inventory costing $34,500 AUD. Payment is due on February 28, 2022. On the same date, the
company paid P32,800 to acquire an option contract for $34,500 AUD and the option price was
P34.80.

Nov. 1 Nov. 30 Dec. 31 Jan. 31 Feb. 28

Market price 32.90 35.40 37.51 38.12 38.20
FMV Option ? 33,500 94,900 115,600 ?

1. What is the forex gain or loss in the hedging instrument due to change in the effective
portion on November 30, 2021, if changes in the time value will be excluded from the
assessment of hedge effectiveness?
a. 86,250 loss
b. 72,795 gain
c. 20,700 gain
d. 700 gain

2. What is the forex gain or loss in the hedging instrument due to change in the ineffective
portion for the year 2022, if changes in the time value will be excluded from the
assessment of hedge effectiveness?
a. 1,060 loss
b. 1,405 loss
c. 345 loss
d. 12,800 loss

3. If changes in the time value will be included in the assessment of hedge effectiveness, what
is the forex gain (loss) in the hedging instrument for the year 2021?
a. 62,100 gain
b. 61,400 gain
c. 82,800 gain
d. 94,900 gain

4. How much is the net forex gain or loss as a result of the hedging activity on January 31,
2022?
a. 41,745 net gain
b. 0
c. 345 net loss
d. 97,290 net loss

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7. On September 1, 2021, 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, 2022. On October 1, 2021, 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, 2022.

On September 1, 2021, 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, 2021, 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 sales transaction occurred on the date anticipated. For the year ended
December 31, 2022, 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:

9/1/2021 10/1/2021 12/31/2021 1/31/2022 3/31/2022

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 Other Comprehensive Income of
Statement of Comprehensive Income for the year ended December 31, 2021?
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, 2022?
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, 2022?
a. 600 cumulative credit
b. 6,600 cumulative credit
c. 2,400 cumulative credit
d. 9,000 cumulative credit

END

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